Q: The Board of Directors of Avanthi Ltd., a listed company, at its meeting held on 01/04/2015 announced a proposal for issue of bonus shares to all equity shareholders of the Company at 1:1 ratio. On 01/05/2015, the Directors at another meeting passed a resolution to reverse the proposal of bonus issue announced on 01/04/2015. Discuss the validity of the proposal and the reversal ?

Ans: This problem is related to 'the validity of the proposal and its reversal'. Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014, provides that a Company which has once announced the decision of the Board recommending a bonus issue shall not subsequently withdraw the same. Once the Board recommends, the bonus issue cannot be withdrawn even if the members decide so. In other words, you are forcing the shareholders to accept the recommendation of the Board. So it is only a formality to seek approval of the shareholders and even if it is rejected or not passed by the members in the Extraordinary General Meeting, the Company still has to go ahead with the issue of bonus shares by virtue of Clause (f) of Subsection (2) of Section 63.
Thus, a Company shall not capitalise its profits or reserves for the purpose of raising bonus shares unless the following conditions are satisfied namely; a) authorisation in articles of association; b) bonus issue must be authorised by the members of the Company in general meeting on recommendation of the Board. The clause envisages passing of an ordinary resolution in general meeting. Rule 12(6) requires a Company to pass shareholder's resolution for the purpose of capitalising its profits or reserves, amongst other conditions prescribed.

In the instant problem, the proposal dated 01/04/2015 is valid. The proposal dated 01/05/2015 is not valid. Therefore, the reversal proposal of bonus issue is not valid.

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