Key Benefits of Bonus Issue of Share

What is Bonus Issue?

Most companies use to pay a bonus to their employees similarly some desire to pay the bonus to their shareholders as well. However there is no limitation that they have to pay shareholders with cash only, the shares can also be used to pay bonuses. But several times besides earning a good profit the companies did not become in the position of paying bonuses in cash, due to unsatisfactory cash position or its adverse effects on the working capital of the company.

The companies following the articles of association which allows bonus payments to the shareholders in the form of shares by transforming partly paid shares to fully paid or by issuing fully paid bonus shares.

If it goes with the dictionary meaning of bonus shares, it refers to ‘a premium or gift, usually of stock, by a corporation to shareholders’ or “an extra dividend paid to shareholders in a joint-stock company from surplus profit.” However, the bonus shares are neither dividend nor a gift in the legal context. Because it is governed by so many regulations that restrained bonus shares from being declared as a dividend or a gift. While Section 205 of the Companies Act, 1956 also not allow the issuance of bonus shares instead of dividends, expect its payment in cash as well. Pronouncing it as a gift is also wrong because reflect the past sacrifice of the shareholders.

Consequences of Bonus Issue

When a company earns huge profits and reserves, it does not mention the exact figures in the balance sheet. Consequently, the company’s real image considering its capital structure does not come upfront and the shareholders remain to get a fair return on their investment. Thus, if the company desires to pay additional profit to its shareholders, the Articles of Association can allow companies to do so by way of issuing bonus shares.

The bonus issue impacts two times, i.e:

The profit company earns and reserves get reduced with the issuance of bonus shares.

The company’s share capital that’s paid-up experiences a corresponding increase.

When a company issues bonus shares, it transforms the company’s accumulated profits and reserves into share capital which is further utilized in the business. While the process of transforming profit and reserves into bonus shares known as the Capitalization of Profits and Reserves.

Following are the cases responsible for the issue of bonus shares:

If a company managed to collect huge profits and reserves and wishing to capitalize these profits into business permanently.
If the company cannot announce a higher rate of dividend on its capital, besides possessing a sufficient profit, due to the Government imposed restrictions on the payment of dividends.
If the company can't promise a higher rate of the dividend because the shareholders will expect the same higher rate of dividend in the future also.
If the company cannot pass on cash bonus due to the unsatisfactory cash position and its adverse effects on the working capital of the company.
If the nominal value and market value of the company shares differs a lot.

Hence, the company issues a bonus to attain these objectives:

To equalize the amount of issued and paid-up capital with the capital employed to the business in order to showcase the real earning capacity of the company.
Lowering the abnormally high rate of dividends on its capital so that the problems such as labor demands for higher wages and the entry of new entrepreneurs owing to the attraction of abnormal profits can be restricted.
The shareholders can be paid bonuses without affecting the liquidity and earning capacity of the company.
The nominal value and the market value of the company shares become comparable.
The balance sheet to be corrected to reveal a realistic capital structure of the company.

Advantages of issuance of Bonus Shares:

(A) Advantages from the company’s point of view:

The capital of the company can bring a larger and more profitable business.

The company can get rid of market influences.

The bonus payment to shareholders in the form of shares, not in cash, maintained the liquidity of the company while the working capital did not get affected.

The company can utilize its profits permanently and its working capital also increases.

Bonus shares are the least expensive method of generating additional revenue for the expansion of the business.

The bonus issue of shares brings down the high rate of dividend which makes the company restrict the entry of new entrepreneurs into the business. Consequently, the competition reduces in the business.
The balance sheet of the company now produces a more clear and realistic view of the capital structure and the capacity of the company.

Advantages from the investors and shareholders point of view:

If noticed from the investor's and shareholders' point of view, generally they did not get much from the issue of bonus shares. Besides an increase in the number of shares certificates, their proportionate ownership remains intact in the company.

Other Advantages of the Bonus Issue of Shares impact Shareholders are as follows:

With bonus shares, the investors get availed with a permanent source of income.
Bonus shares reduce dividend rate, which in turn increase the total amount of dividend investor will get due to a larger number of shares.
If the investors wish to sell these shares, they can and enjoy an immediate cash payment.

Disadvantages of Issuance of Bonus Shares:

Following are the disadvantages of the issue of bonus shares

(1) The issue of bonus shares drastically brings down the future rate of dividend consequently the capital and earnings of the company decreases with the issue of bonus shares.

(2) The lowered future rate of dividend results falls in the market price of shares, which relatively brings unhappiness to the shareholders.

(3) The issue of bonuses reduces the reserves of the company which develops insecurity among the investors.

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Role of Registrar and Transfer Agents in Rematerializing Securities

Depositories enable individuals to convert their physical share certificates into electronic account balances and vise-versa. Remat is that facility allotted to the investor through which he/she can easily convert his/her electronic security holdings with depositories into physical share certificates. To be noted: Securities requested for rematerialization cannot be traded. 

There could be various reasons Remat the securities like hinderance in trading because of trade-locked securities or simply when there is no desire to trade in shares or bonds.

By-Law 9.4: Rematerialisation And Business Rule 11.2: Rematerialisation of securities -are the legal provisions applied in this process.

Scrutinizing Rematerialization Process

Condition 1 -  You have decided to quit dealing in securities but you still have shares in your Demat account. Your Demat account charges you Rs. 500 to Rs. 1000 every year as annual maintenance fees, so to avoid paying maintenance charges in the name of account which you don't actually require, you can rematerialize your electronic securities in physical share certificates.

Condition 2 - Many investors have infrastructure bonds in their Demat accounts, such bonds are trade - locked securities and cannot be touched for at least five years. That means you cannot switch your demat securities from one participant to another before five years. You can choose to rematerialize your trade - locked bonds.  

The whole process of rematerialization takes not more than 30 days starting from the day of quoting a request.  

Rematirialization of securities is easy via the following steps:

1. Submit a request for Rematerializing your securities:

One needs to apply for rematerializing his/her electronic securities to the DP in which he already has a demat account. 

2. DP Verifying the Request:

DP upon receiving the request form from the applicant examines the form to check its accuracy. If the form filled is errorless, it issues the signed and stamped slip of acknowledgment to the applicant. While verifying the request form DP matches the signature of the applicant with the specimen signature in previous records. If the signatures are contrasting then DP does not approve the request.

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3. DP Transfering Request to NSDL:

DP enters request details in its DPM (software provided by NSDL to the DP), then transfers the request to the issuer of securities or R&T Agent. If the applicant has insufficient balance in his demat account, then the request will get rejected by DP. DP will inform about the same to the client.   

4. DPM issuing RRN:

If the applicant fulfills all the pre-set requirements and has sufficient balance in his account, the request will be extended to DPM, DPM in return will issue a Rematerialisation Request Number (RRN) which has to be filled in the rematerialization form. 

Read Also:-  Process To Remate The Security Holding Under RTA Services

5. Further Verifying The RRN Details:

The details in RRN has to be verified by a person other than the person entering the data. Once all the formalities are completed by DP the request reaches the DM, which further is extended to the Issuer or an R & T Agent via electronic modes.  

6. Rejection of Request by Issuer or Registrar & Transfer Agent:

Upon receiving the request from DM, Issuer or Registrar & Transfer Agents will process the request. They have the right of rejecting the request and report the objection to DP. they can send an objection memo to DP asking to clarify the objection. 

7. Acceptance of Request by Issuer or R&T Agent:

If the Issuer or R&T agent qualify your request for rematerialization will print and further despatch the certificates to the client. Simultaneously sends an electronic confirmation to the DM.

8. Status Update:

The DM downloads this information to the DPM and updates the status of rematerialization request in the DPM. The depository will update the account of the shareholder from which the rematerialized shares will be excluded.

9. Issuing Physical Share Certificates to the clients:

Once the request form is validated and approved by each party, the registrar will issue the physical share certificate to the client.

  

10. Fees Charged for the Remat Process:

As per the laws mentioned in Depositories Act, the depository cannot impose any stamp duty for transferring the shares when a remat request is made and only a nominal fee is charged for completing the process.

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Detailed Procedure for Grant or Renewal of RTA Certificate by SEBI

Registrar and Share Transfer Agent (RTA) is an organization that is designated to operate as an intermediary between investors and mutual fund houses. Registrar & Share Transfer Agent regulates all financial and non-financial processes like maintaining investor’s transaction records, processing those records for further reporting to the authorities, granting various application forms and assistance related to mutual fund investments. Mutual fund houses deal with investor’s daily transactions whereas RTA manages the records of such transactions on behalf of the mutual fund house associated with it.   

SAG RTA Registrar and Share Transfer Agent, CAMS, and Karvy are some of the prominent RTA service providers in India who serve investors as well as mutual fund houses with utmost care and responsibility. With their widespread branches, these RTA service providers can reach out to their clients present anywhere in the country. 

Investors can reach out to RTA for assistance related to security dematerialization by major depositories (NSDL or CDSL), issuing share transfer certificate, updating name, address or signature, dividend payouts and lot more.

SAG RTA, Registrar and Transfer Agent Services, is capable of solving investor’s issues and introducing them to various profitable mutual fund schemes and offers. 

 

All the RTA service providers operating in India are certified by the Security Exchange Board of India (SEBI). RTAs operating in India adhere to the guidelines listed in the Security Exchange Board of India (SEBI) Regulations 1993. 

Requisites for Qualifying as an RTA Service Provider from SEBI

Initially, the applicants must fill Form A along with the fees of Rs. 6 Lakhs  (non-refundable) for category 1, for category 2 the fees is Rs. 2 Lakhs (non-refundable). 

 

After filing the form, the board asks for additional information (not mentioned in Form A) as per the preset criteria. Even the applicant himself needs to appear in the board office before the board giving approval for performing RTA Services to the applicant.  

 

In case of any default, the board is authorized to reject the application. It will provide the statement mentioning all the errors and will give another chance to the applicant for fulfilling all the requirements within a given time limit.

Detailed Registrar and Transfer Agent Registration Procedure with SEBI

1 Applying for Certificate of Registration via Form A

The very first step towards becoming a SEBI registered RTA service provider is filing an application with the help of Form A to SEBI.   

2. Categories under which one can apply to become Registrar and Share Transfer Agent 

RTA services are divided into two categories either of which can be chosen by the applicant: 

• Category I: Carrying out services as both Registrar to an issue and share transfer agent.
• Category II: Carrying out services either as a registrar to an issue or as a share transfer agent. 

3. The applicant needs to provide further information to SEBI

The Board may ask the applicant to provide additional information necessary which is not mentioned in Form A and is required for issuing the certificate for Registrar and Transfer Agent registration. The board may ask the applicant or concerned principal officer to walk up to the board office for personal representation before the Board.   

4. Re-apply if the board rejects your application

As per the sub-regulation (2) of regulation 3 of the SEBI Act 1992, the board has the authority to disapprove Form A based on some errors in the information or non-adherence to the instructions. The Board will give a second chance to furnish form A within a given time limit. One must make sure that all the conditions mentioned in Form A should be fulfilled.

5. Scrutiny of the Candidate’s Application

Before granting the approval to work as a certified RTA, SEBI will thoroughly inspect all the aspects and make sure that everything favors a successful approval.

SEBI will make sure of the following points before granting approval:

1. The applicant must have sufficient infrastructure, the latest equipment/techniques and an expert team to effectively handle RTA processes.  
2. The applicant must have knowledge related to RTA services. 
3. The applicant must not be related (directly/indirectly) to a person who has been earlier rejected by the SEBI board to operate as an RTA. 
4. The applicant must have adequate capital to perform as RTA, mentioned in regulation 7 under SEBI regulations
5. Is under the radar of any disciplinary proceedings as per the SEBI Act for any of the director/applicant partner/principal officer has been found guilty for an economic offense, involving moral turpitude. 
6. Is a fit or proper person (mentioned in schedule II of securities and exchange board of India (intermediaries) Regulation, 2008.

6. Capital Adequacy as suggested by SEBI

The capital sufficiency requirement for an applicant to get certified as an RTA as per SEBI guidelines: 

• Category 1: the net worth for an applicant should be min Rs. 50 lakh and can go beyond.
• Category 2: the net worth of the applicant must be min Rs. 25 lakh.

6.2 The term ‘net worth’ given here has been defined under the sub-regulation (3) of SEBI, which denote:

In case, if the applicant is a firm or association of persons or any body of individuals, the total value of capital contributed to such business by the applicants, and free reserves of any kind to their business are accounted as net worth.

In the case of a corporate body, total net worth is the actual value of paid capital and free reserves that are registered in the application account books at the time of submission of application for grant of certificate to operate as an Registrar & Transfer Agent, according to the sub-regulation (1) of regulation 3 of SEBI.

7. Process for further registration

SEBI, after working upon the eligibility criteria and finding candidates eligible for performing as an Registrar & Transfer Agent Services provider, is obliged to extend a notice informing the candidates about their eligibility and category under which they can serve as a certified Registrar Transfer Agent. It is indeed the responsibility of the board to inform the candidate about the eligibility criteria for grant of certificate in Form B, which also depends upon the fee payment given under regulation 12 of SEBI.

8. Criteria for RTA Certificate Renewal 

The registrar to an issue or share transfer agent must apply for the renewal of the RTA certificate three months before its expiry period. The RTA service provider can do so with the help of Form A.

8.1 The renewal application must be processed in a way similar to applying for a fresh RTA certificate stated under regulation 3 by the Board.  

8.2 Criteria for Certificate Renewal

The below-mentioned conditions get applied in case of renewal granted under the registration 9 or any registration granted in accordance with regulation 8:

• In case an applicant applies for status or constitution change, prior Board permission is required to operate with the same power post-change.
• A certain amount is paid by the applicant for the renewal of the RTA certificate. The amount is determined by the SEBI. 
• Capital adequacy will be re-examined by the authorities. The applicant must fulfill all the requirements under regulation 7 of SEBI from the grant of the certificate until its expiry.
• SEBI approved RTA service providers must not take more than a month to resolve all the grievances from investors, to continue working as an RTA and subsequently inform all its stakeholder members about details like total complaints, etc.
• The candidate must comply with all the SEBI regulations while carrying out its activities as a registrar to an issue or share transfer agent before applying for a renewal. 

9. The procedure, in case, application for grant of certificate gets Rejected

9.1. In case the application for granting or renewing the RTA certificate fails to abide by SEBI guidelines then the Board has the right to disqualify the application but has to give the opportunity to re-apply fulfilling all the preset requirements by SEBI.

9.2 The Board informs the applicant about the rejection of his RTA certificate within three days from the date of applying for certificate along with the valid reason for the refusal.

9.3 Applicant can re-apply to the Board within thirty days from the date of getting a rejection notice from the Board post consideration, as per sub-regulation (2) of SEBI guidelines.

9.4 On receiving the application for reconsideration by an applicant, the Board will re-scrutinize the application and report the conclusions in a written format to the applicant. 

10. RTA Certificate (Grant or Renew) Refusal Consequences

Candidates whose application for granting or renewing the RTA certificate gets rejected by the Board, from the date of receiving the rejection notice are not eligible to perform any RTA related activities. Valid under regulation 2 of regulation 10 of SEBI.     

11. Payment Fees for a Grant or Renewal of RTA Certificate

11.1 The candidates, applying for a grant or renewal of RTA certificate in order to operate as a certified RTA agent should submit a certain amount as the processing fee to the Board within the specified time period and in a manner as given under Schedule II of SEBI regulations.

If the candidate fails to pay the renewal fees, the Board has the right to cancel or suspend his certificate, as a result, the registrar and share transfer agent will not be able to further extend its services to its clients as an RTA service provider or provide any RTA forms to the clients.   

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What are the Documents Required for Change of Registrar and Transfer Agent (RTA)?

A long list of certificates needs to furnished by companies or mutual fund houses to Central Depository Services Private Limited (CDSL) for their request against the change of Registrar and Share Transfer Agent.

Once such documents are received by CDSL, it verifies and authenticates the same to proceed with the change request. After completion of the verification process, execution agreement is passed on to the issuer company/RTA by CDSL.

Although, the entire process of Registrar & Share Transfer Agent change takes a long time for companies and also require them to submit multiple certified and accurate documents, which they are mostly unaware.

So. this article will provide an in-depth idea about the Registrar and Transfer Agent change procedure along with the mandatory documents that need to be furnished by companies to CDSL.

Below is a list of Key Documents whose Certified Copies Should be Submitted to CDSL by any Issuer/Company for Change of Registrar and Share Transfer Agent:

• Tripartite Agreement 

This document is signed by all the key parties, i.e., issuer/company, issuer’s RTA, and CDSL involved in the process to change of Registrar and Transfer Agent (RTA). This legal document also highlights the key roles, responsibilities, and obligations of all three parties. For the change of RTA, a fresh tri-partite agreement duly written on an INR 600/- stamp paper is required from any issuer company. This stamp-based tri-partite document should also carry authorized signatures of RTA and issuer/company.

• No Objection Certificate (NOC)

A NOC is a legal certificate that is issued by any company/entity indicating that it does not have any objection against the points or details mentioned in the NOC document signed by it. The companies looking for the change of RTA must furnish a no-objection certificate (NOC), issued by their current RTA, to CDSL. This NOC document should be written on the letterhead of the current Registrar & Transfer Agent of the issuer company.

• Document for Total Application Fee Charged By CDSL

Any particular company looking for a change of RTA should also submit the documents, reflecting the total fee charged by CDSL and any other outstanding issuer charges.

• Latest Certificates from Practising CA/CS

The company looking for the change in RTA should also provide the latest certificates from practicing company secretary/chartered accountant, which disclose details about the total issued capital to the issuer company, its annual balance with NSDL, CDSL and total physical share certificates according to the register of members. All such CA authorized certificates should be furnished by the companies to CDSL.

• Master Creation Form (MCF)

A Master Creation Form or Letter of Intent is used by companies to register as an issuer with CDSL. Registering as an issuer allow companies to offer Demat facility to its shareholders. The companies, through this form, also submit the securities to the CDSL in order to obtain an

International Securities Identification Number/s (ISIN/s) for the same.

During the change of RTA, master creation form also needs to be furnished to CDSL from the company end. This form should be duly signed and stamped by the authorized company signatories.

• Letter of Acceptance/Consent (LOA)

The companies should also submit Letter of Acceptance (LOA) to the CDSL while requesting for the change in RTA. Letter of Acceptance should be written on the letterhead of newly appointed RTA by the company. This LOA is a legal agreement reflecting that new RTA is ready to undertake all the share transfer responsibilities for the issuer company.

Note:- For in-house RTA, LOA is not required.

• Declaration Statement

Finally, the companies looking for the change in RTA should also furnish a declaration statement to CDSL, indicating that the company is ready to comply with all the necessary guidelines and procedures related to RTA change. The company will also be responsible for tackling all the grievances or complaints arising during RTA change process.

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