The Curious Case of Reliance Industries’ Bonus Issue

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On September 13, 2017, Reliance Industries Limited allotted bonus shares in the ratio of 1:1 after it received approval from its shareholders through a postal ballot on September 4, 2017.

Prior to the bonus issue, i.e., as on June 30, 2017 the promoters held 46.30% shares and the public shareholders held 53.70% shares of Reliance Industries. A bonus issue of 1:1 would mean every shareholder getting new bonus shares on proportionate basis that would result in no change in shareholding. However, the shareholding pattern after the bonus issue reflected an increase in promoter shareholding, i.e., from 46.30% to 47.55%.

In this article, we discuss how was there such a change in the promoter’s shareholding after the bonus issue of 1:1.

It is all about the Treasury Shares

Among the shareholders of Reliance Industries, are names like Reliance Chemicals Limited and Reliance Polyolefins Limited, categorized as “non-promoter” or “public” shareholders. These are in fact, 100% subsidiaries of Reliance Industries. As on June 30, 2017, i.e., before the bonus issue, such subsidiaries held 5.44% of shares of Reliance Industries.

Section 233(10) of the Companies Act, 2013 says that no company, on merger or amalgamation, can hold any shares in its own name or in the name of any trust on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation.

Such shares are called treasury shares.

Section 77 of the old Companies Act, 1956 prohibited issue of own shares by the company but allowed holding of shares through trusts. This has been addressed by the new Act where trusts and subsidiaries are prevented from holding the shares of the company.

A reading of Section 233(10) suggests that no company will be allowed to hold any treasury shares directly or indirectly after a merger or demerger. The Act is silent on existing treasury shares held by companies or their subsidiaries. So, it is understood that such existing treasury shares are allowed to be in existence.

Hence, the subsidiaries of Reliance Industries that have been holding these treasury shares even before the new Act became effective, have been allowed to continue holding them. However, a bonus issue would result in granting of new shares to these subsidiaries in proportion to their shareholding, which would in turn be in violation of Section 233(10). Hence, Reliance Industries has not allotted any bonus shares to these subsidiaries. As a result, all the shareholders of Reliance Industries, excluding these subsidiaries, were allotted bonus shares after the bonus issue. Since these subsidiaries are classified as public shareholders, the overall shareholding pattern reflected an increase in the promoter holding.

An important point to note is that although these subsidiaries held shares of Reliance Industries, there was no voting rights on these shares. Hence, the bonus issue may have reflected an increase in shareholding of promoters but voting rights of all shareholders, including promoters remain unchanged after the bonus issue.

Impact on Minority Shareholders

Since there is no change in the voting rights of any shareholder, the bonus issue and subsequent increase in promoter shareholding has no impact on the rights of the minority shareholders.

Text of Section 233(10) of the Companies Act, 2013

“A transferee company shall not on merger or amalgamation, hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation.”