The Securities and Exchange Board of India (SEBI) is considering imposing additional preconditions concerning the issuance of bonus shares by a listed company. The preconditions have been pitched by the market regulator in a consultation paper.
Currently, bonus issues are governed by Section 63 of the Companies Act, 2013 and Chapter XI of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). The Companies Act, 2013 provides certain conditions for the issuance of bonus shares out of a company's free reserves, securities premium or capital redemption reserve account. Additionally, there are other conditions imposed by the ICDR regulations as well.
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The market regulator has released the consultation paper after observing that in certain instances a company announces the issuance of bonus shares while it is still to receive in-principle approval for listing and trading approval from stock exchange(s) for its previous issuances. Such disputed previous issuances are stalled for failing to comply with pricing guidelines or regulatory provisions. In such a situation, the bonus shares issued by the company fail to get in-principle approval for listing and trading on the bourses.
In such a situation, there is a mismatch between the listed capital and issued capital of the issuer. Due to the mismatch in issued shares and listed shares, stock exchanges find it difficult to grant in-principle approval for the bonus issue, unless the discrepancy is resolved.
Compounding matters further is the fact that providing approval to such a bonus issue will further exacerbate the mismatch between the listed capital and issued capital of the issuer. "Thus, in such a scenario, it would not be prudent to grant bonus shares on such incorrect past issuance." the paper states.
Consequently, it has proposed that "a listed issuer shall be eligible to announce its bonus issue only if it has received in-principal approval from the stock exchanges for the listing of all the pre-bonus securities."
The regulator goes on to point out that as long as a mismatch exists between listed capital and issued capital, "the issuer company may not be considered eligible to announce bonus issuances (as) bonus issue announcement is a price sensitive information and it is imperative that the bonus issue is implemented in a timely manner."
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