Preference Shareholders and Bonus Shares: Understanding the Eligibility

When it comes to issuing bonus shares, the equity shareholders are the primary recipients. However, a common question arises regarding the eligibility of preference shareholders for bonus shares. This article aims to clarify the situation by addressing the legal status and practical considerations regarding this topic.

Eligibility of Preference Shareholders for Bonus Shares

To begin, it is important to understand the position of preference shareholders. By definition, preference shareholders are not eligible for dividends, rights, or bonus shares. The Companies Act 2013 of India governs the rights and responsibilities of shareholders, and as per this act, preference shareholders do not have the right to receive bonus shares. This is consistent with the broader responsibilities and duties enshrined within the act.

The legal framework clearly states that bonus shares are issued exclusively to equity shareholders. Preference shareholders, who primarily focus on fixed dividends, do not have the same rights or privileges as equity shareholders. This includes participation in rights issues, bonus shares, and voting rights during annual general meetings (AGM).

Why Preference Shareholders Are Not Eligible for Bonus Shares

The rationale for this distinction is rooted in the nature of preference shares. Preference shares are equity instruments that come with a fixed dividend and priority in the event of liquidation. They are typically issued to raise capital without giving the issuing company the burden of full ownership and management responsibility.

When a company issues bonus shares, it is essentially rewarding existing shareholders for their loyalty and investment. Preference shareholders, who are not subject to the same level of risk and do not have voting rights, do not benefit from such bonuses. Issuing bonus shares to them would not align with the underlying principles of the preference share structure.

Practical Considerations

Despite the legal clearances, practical considerations often play a role. For instance, corporate governance best practices suggest that companies should align their shareholder policies to ensure fairness and equity among all stakeholders. Issuing bonus shares to preference shareholders might create internal discord, given that they do not share the same rights as equity shareholders.

Furthermore, the redeemability feature of preference shares, which mandates that they must be redeemed by the company within a maximum of 20 years, adds another layer of complexity. If a company issues additional shares to preference shareholders, it increases its liability and financial obligations. This could potentially create a situation where the company is saddled with more debt or financial stress, which is not a desirable outcome.

Conclusion

In conclusion, preference shareholders are not eligible for bonus shares due to the legal and practical reasons outlined. The Companies Act 2013 of India, while not explicitly prohibiting such an action, does not support it from a legal perspective. Practically, it is not advisable to issue bonus shares to preference shareholders as it can create equity issues and financial liabilities for the company.

For clarity, the key considerations are:

No legal provisions restrict the issuance of bonus shares to preference shareholders. Bonus shares are only issued to equity shareholders. Preference shareholders do not have rights to dividends, rights, or bonus shares. Potential risks and liabilities can arise from issuing bonus shares to preference shareholders.