TMI Blog1983 (9) TMI 236X X X X Extracts X X X X X X X X Extracts X X X X ..... who holds sixty-five bonds, issued by it pursuant to the said prospectus a reduction of Rs. 90 (40%) in the conversion price of Rs. 225 per equity share fixed in the said prospectus." The plaintiff's case is that on or about August 14, 1980, the defendant issued a prospectus offering to the public 5,35,500 100% convertible bonds of Rs. 450 each for cash at par on the terms set out therein. The terms, inter alia , provided as follows: "4. Value : The bonds will have a face value of Rs. 450 each. Options: Each bond carries a right to receive two ordinary shares of Rs. 100 each of the company at a price of Rs. 225 as per following terms: ( a )The first option to receive one share will be available within three months after the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany announced a bonus issue in the proportion of 2:5 to the shareholders of the defendant company and at the same time announced a reduction of Rs. 64.30 per option share of the shareholders. The conversion price of each option share was announced at Rs. 160.70. It is the plaintiff's case, that since the defendant company had made a bonus issue at the ratio of 2:5, the proportionate reduction expressed in arithmetic unity must mean 225 2 = 450 divided by 5 = 90 or 2/5 of Rs. 225 which is Rs. 90. That in or about July, 1981, the plaintiff wrote to the defendant company disputing the defendant's construction of clause ( d ) (see para. 2 above) and setting out what, according to him, would be the proper interpretation and calculation. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e). In this context, what needs to be examined is as to what are the mechanics of issuing a bonus share. In Pennington's Company Law, fourth edition, at page 371 it has been observed as under: "The mechanics of issuing bonus shares or debentures are similar to those of issuing shares or debentures subscribed for in cash. After the necessary resolution for the capitalisation of profits or reserves has been passed, certificates in respect of the bonus shares or debentures are issued to the members entitled to them, and appropriate entries are made in the register of members or debenture holders. Alternatively, if the bonus shares are to be renounceable for a period, letters of allotment or renounce-able certificates are issued in the firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities out of share premium account), and so the company pays advance corporation tax on the redemption payment, and it is treated as part of the income of the holders of bonus securities for income-tax, but the tax which has already been paid on the issue of the bonus shares is allowed as a credit against the income-tax payable on redemption." Note 6 reads as follows: "6. If a company has an issued capital of 1,00,000 in ordinary shares of 1 each, and reserves of 50,000, and the market value of its shares is 1.50, a capitalisation of the reserves on the basis of one bonus share for each two shares already held will reduce the market value of each share to 1 or a few pence more. Each shareholder will now have three sha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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