ISSUE OF PREFERENCE BONUS SHARES TO EQUITY SHAREHOLDERS? Possibilities and Tax Implications.
CA Rahul Singh
Rachit Sharma
Parth Chourikar
Senior Manager Research and Advisory, Taxmann
Sr. Manager Research and Advisory, Taxmann
Team Research and Advisory, Taxmann
ISSUE OF PREFERENCE BONUS SHARES TO EQUITY SHAREHOLDERS? Possibilities and Tax Implications.
CA Rahul Singh
Rachit Sharma
Parth Chourikar
Senior Manager Research and Advisory, Taxmann
Sr. Manager Research and Advisory, Taxmann
Team Research and Advisory, Taxmann
Contents 1.
Introduction
5
2.
What exactly did Siyaram propose?
5
3.
The Legal Architecture of the Scheme
5
4.
Why was Section 230 of the Companies Act, 2013 specifically chosen for the arrangement?
6
5.
Dematerialisation and Listing of Preference Shares
6
6.
Allotment of preference shares
7
7.
7. Conclusion
9
1.
Introduction
Can a company use its accumulated reserves to create a new yield-bearing security without diluting its existing equity base and preserving its Earnings Per Share (EPS)? At first glance, that may sound like a financial paradox. Yet, this is broadly what makes the Scheme of Arrangement of Siyaram Silk Mills Limited [2026] 189 taxmann.com 730 interesting. Sanctioned by the National Company Law Tribunal, Mumbai Bench, on 21 July 2026, the Scheme provides for capitalisation of the Company’s general reserves to issue Preference Shares by way of bonus to its existing equity shareholders. The structure allows the Company to unlock accumulated reserves without an immediate cash outflow, while giving shareholders a separate, income-bearing security with a defined redemption mechanism. What makes the transaction particularly intriguing is that it achieves this without issuing additional equity shares. Consequently, unlike a conventional equity bonus issue, the transaction does not increase the number of equity shares and therefore does not have the same dilutionary impact on EPS. The Scheme thus offers an interesting case study in corporate structuring, particularly on the choice of a Section 230 Scheme when conventional mechanisms such as dividends, buy-backs, and bonus issues are already available.
2.
What exactly did Siyaram propose?
The Scheme provided for the utilisation of the Company’s general reserves to issue fully paid-up preference shares to equity shareholders appearing in the register of members or depository on the Record Date. It provided for every one equity share of Rs. 2 the following: (a) (b)
Four Series-I preference shares of Rs.10 each; and Three Series-II preference shares of Rs.10 each.
Thus, for every one equity share held, the shareholder becomes entitled to seven preference shares having an aggregate face value of Rs. 70. This is not, however, the same as receiving Rs. 70 in cash. The scheme specifically records that the bonus issue of preference shares does not involve the release of assets by the Company to shareholders at the time of issuance. The economic value is therefore embedded in the preference shares and their rights, including their eventual redemption, rather than being an immediate cash distribution.
3.
The Legal Architecture of the Scheme
The scheme was proposed and sanctioned under Section 230 of the Companies Act, 2013, which provides the statutory framework for compromises or arrangements between a company and its members or creditors. In the present case, Siyaram invoked Section 230 for an arrangement with its equity shareholders involving the issue of preference shares by way of a bonus out of the Company’s general reserves. The Board of Directors approved the scheme on 26 October 2024, stating that the company’s substantial surplus reserves could be utilised for the benefit of shareholders while retaining adequate resources for its business requirements.
Issue of Preference Bonus Shares to Equity Shareholders? Possibilities and Tax Implications.
5
As a listed company, the scheme was also subject to the regulatory framework applicable to schemes of arrangement under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. In accordance with Regulation 37, Siyaram obtained observation letters from BSE and NSE and placed the same before the Tribunal. The scheme was thereafter approved by the requisite majority of equity shareholders and unsecured creditors, while the meeting of secured creditors was dispensed with on the basis of consent affidavits. During the proceedings, the Regional Director raised observations concerning various statutory requirements, including Section 133 of the Companies Act, 2013 relating to accounting standards, Sections 55 and Section 63 of the Companies Act, 2013 concerning preference shares and bonus shares, and Section 42 of the Companies Act, 2013 relating to allotment and filing of Form PAS-3. The Company furnished the requisite explanations and undertakings, including compliance with Sections 55 and 63 to the extent applicable and the prescribed post-allotment filings. After considering the Scheme, the regulatory observations, and the Company’s responses, the NCLT held that the Scheme was fair and reasonable, not contrary to law or public policy, and sanctioned it.
4. Why was Section 230 of the Companies Act, 2013 specifically chosen for the arrangement? The choice of Section 230 appears to have been driven by the Company’s objective of implementing this unconventional distribution of reserves through a formal, Tribunal-supervised Scheme. While the Companies Act provides separate mechanisms for dividends under Section 123, bonus issues under Section 63, and buy-backs under Section 68, Siyaram proposed creating a new class of preference share capital for its existing equity shareholders. The Company stated that the issue of preference shares by way of bonus was being undertaken under Section 230 to maintain corporate governance and transparency, subject to applicable statutory, regulatory, and corporate approvals. The distinction from a conventional bonus issue is important. The Scheme does not increase the number of equity shares; instead, for every one equity share of Rs. 2, the shareholder receives four Series-I and three Series-II preference shares of Rs. 10 each. Section 230 therefore provided the framework for implementing an arrangement involving capitalisation of reserves and creation of a separate class of preference share capital, while the substantive requirements of Sections 55 and 63 continued to apply.
5.
Dematerialisation and Listing of Preference Shares
Under the Scheme of arrangement, the preference shares are to be issued in dematerialised form. For shareholders whose equity shares are held in physical form, the Scheme provides for the corresponding preference shares to be allotted to a designated Corporate Trustee and held in trust until the shareholder furnishes valid demat details. The Trustee will hold the securities and related corporate benefits on behalf of such shareholders.
6
Issue of Preference Bonus Shares to Equity Shareholders? Possibilities and Tax Implications.
The Company is also required to apply for a listing of the preference shares on the stock exchanges. Until the requisite listing and trading permission is obtained, the securities will remain frozen in the depository system. This ensures that the scheme accommodates both dematerialised and physical shareholders while keeping the preference shares within the applicable listing and depository framework.
6. Tax Implication of the Capitalisation of reserves via Preference Shares The Scheme’s tax implications should be examined at three key stages: allotment, conversion, and redemption of preference shares.
6.1.
Allotment of preference shares
6.1-1. Deemed dividend AUnder section 2(40)(a) of the Income-tax Act, 2025 (‘ITA’), a distribution of accumulated profits constitutes dividend only where such distribution entails the release by the company to its shareholders of all or any part of the company’s assets. In the present case, the Scheme itself provides that the issue of bonus preference shares does not involve any release of assets by the Company at the time of allotment. The transaction merely converts a portion of the Company’s general reserves into preference share capital. The underlying assets continue to remain with the Company. Further, section 2(40)(b) of the ITA states that ‘dividend’ includes “any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not”. A reading of this provision reveals that it explicitly refers to bonus shares issued to preference shareholders. Thus, this provision will not apply in a scenario where bonus preference shares are issued to existing equity shareholders. Furthermore, the Authority for Advance Rulings also ruled1 that distribution of accumulated profits by a company through the issue of bonus redeemable preference shares to existing equity shareholders would not bring it within the mischief of section 2(22) of the ITA 1961 [Corresponds to Section 2(40) of the ITA 2025]. Accordingly, the allotment of Series-I and Series-II preference shares to Siyaram’s existing equity shareholders should not, by itself, give rise to dividend income in their hands.
6.1-2. Applicability of Section 92(2)(m) Section 92(2)(m) [Corresponds to Section 56(2)(x) of the ITA 1961] deals with deemed income. Deemed income arises where any person receives gifts or acquires immovable property or specified movable assets without consideration or for inadequate consideration. However, courts have generally held that allotting bonus shares without consideration does not create a taxable receipt, since no property or asset actually passes from the company to the shareholder in a typical bonus issue. The Karnataka High Court affirmed2 that when there is an issue of bonus shares, money remains with
Issue of Preference Bonus Shares to Equity Shareholders? Possibilities and Tax Implications.
7
the company and nothing comes to shareholders, as there is no transfer of property and the provisions of Section 56(2)(vii)(c) [provision preceding to Section 56(2)(x)] of the ITA 1961 are not attracted. The ITAT Delhi also reiterated3 that “bonus shares are issued only out of capitalization of existing reserves in the company... and since overall wealth of a shareholder post-bonus or pre-bonus remained the same, provisions of Section 56(2)(vii)(c) are not attracted for taxing bonus shares as income from other sources.” Courts have also distinguished between the creation of new shares and the transfer of existing shares. Section 92(2)(m) primarily targets receipt of existing property without or for inadequate consideration. Since bonus shares represent the creation of new shares, rather than the transfer of existing property, the provision should not apply. The Gujarat High Court held4 that section 56(2)(vii)(c) ought to be applied only in case of transfer of shares. Allotment of new shares cannot be regarded as transfer of shares under section 56(2)(vii)(c). Thus, the issuance of bonus shares does not attract Section 92(2)(m) because it does not involve an actual “receipt of property” or an “accretion to wealth” in the hands of the shareholder. It is a mere capitalization of profits and a re-arrangement of the existing capital.
6.2. Conversion of preference shares Conversion refers to the process by which a shareholder converts preference shares into equity shares of the same company, in accordance with the terms of the preference shares or the applicable scheme. As a result, the shareholder ceases to hold preference shares and instead holds equity shares of the company. Section 70(1)(zb) of the ITA 2025 [Corresponds to Section 47(xb) of the ITA 1961] provides that the conversion of preference shares of a company into equity shares of the same company shall not be regarded as a transfer. Accordingly, converting preference shares into equity shares does not give rise to any capital gains tax liability at the time of conversion. Any tax liability arises only upon the subsequent transfer of the equity shares received on such conversion, in accordance with the applicable provisions of the ITA 2025.
6.3. Redemption of preference shares Issuance of bonus preference shares to existing equity shareholders is not taxable at the time of issuance. However, any gain arising from their subsequent transfer or redemption is taxable under the head “Capital Gains.”
6.3-1. Chargeability of capital gains Section 67(1) of the ITA 2025 [Corresponds to Section 45 of the ITA 1961] states that any profits or gains arising from the transfer of a capital asset effected in a tax year shall be chargeable to incometax under the head ‘Capital gains’. The bonus preference shares, once allotted, constitute ‘capital assets’ as defined under Section 2(22)(a) of the ITA 2025 [Corresponds to Section 2(14) of the ITA 1961], which includes “property of any kind held by an assessee, whether or not connected with his business or profession”.
8
Issue of Preference Bonus Shares to Equity Shareholders? Possibilities and Tax Implications.
6.3-2. Cost of acquisition and period of holding Since bonus preference shares are allotted without any payment, their cost of acquisition for capital gains computation purposes will be nil under the ITA 2025. Further, the holding period will commence from the date of actual allotment of preference shares to shareholders. If bonus preference shares are held for more than 12 months in the case of listed shares and more than 24 months in the case of unlisted shares, they are treated as long-term capital assets; otherwise, they are treated as short-term capital assets.
6.3-3. Tax Rates The applicable tax rate will depend on whether the preference shares are short-term or long-term, and whether they’re listed or unlisted. Long-term gains, whether listed or unlisted, would attract 12.5% tax without indexation. Short-term gains on listed shares would be taxed at 20% if STT conditions are met, and at normal slab rates otherwise.
7. Conclusion The real significance of the Siyaram Scheme lies in the balance it seeks to achieve between shareholder value and corporate liquidity. Instead of an immediate cash distribution, the Company has converted a portion of its surplus reserves into a separate, yield-bearing and redeemable security, while leaving the existing equity capital untouched. This allows shareholders to participate in the Company’s surplus without immediately depleting corporate cash, increasing the number of equity shares, or making any payment of tax. The Siyaram Scheme is ultimately less about giving shareholders more shares and more about deciding what those shares should represent. By converting surplus reserves into redeemable preference share capital, the Company has created a separate avenue for returning value to shareholders without disturbing its existing equity structure. The transaction therefore presents an interesting example of how Section 230 of the Companies Act, 2013 can be used to implement a carefully structured capital distribution rather than a conventional dividend, bonus issue or buy-back.
Issue of Preference Bonus Shares to Equity Shareholders? Possibilities and Tax Implications.
9
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