Debentures, Debenture Stock and Deposit Certificates—Bonus Shares to Preference Shareholders Under Dividend

Debentures, debenture stock, and deposit certificates are popular investment instruments in India. These instruments provide investors with an opportunity to earn interest and receive repayment of the principal amount at maturity. In this article, we will discuss the tax implications of bonus shares issued to preference shareholders under dividend, as well as the legal framework governing debentures, debenture stock, and deposit certificates in India.

Legal Framework

The issuance of debentures, debenture stock, and deposit certificates is governed by the Indian Companies Act, 2013. The Act lays down the provisions related to the issuance, redemption, and transfer of these instruments. Furthermore, the Companies (Share Capital and Debentures) Rules, 2014 provides detailed regulations regarding the issuance and redemption of debentures and debenture stock by companies.

Definition of Debentures, Debenture Stock, and Deposit Certificates

Debentures are long-term debt instruments issued by companies to raise funds from the public. Debenture holders are creditors of the company and are entitled to receive a fixed rate of interest on the debentures. Debenture stock is similar to debentures, but it is issued to the public in the form of shares. Deposit certificates are issued by non-banking financial companies (NBFCs) and are similar to fixed deposits offered by banks.

Taxation of Interest on Debentures, Debenture Stock, and Deposit Certificates

Interest earned on debentures, debenture stock, and deposit certificates is taxable under the Income Tax Act, 1961. The interest income is subject to tax at the individual’s applicable slab rate. However, senior citizens are eligible for a higher exemption limit on interest income earned from bank deposits and debentures.

Bonus Shares to Preference Shareholders Under Dividend

When a company declares a dividend, it may also issue bonus shares to its preference shareholders. Bonus shares are additional shares given to shareholders free of cost, in proportion to their existing shareholding. The issuance of bonus shares to preference shareholders is governed by the provisions of the Companies Act, 2013.

Tax Treatment of Bonus Shares

The issuance of bonus shares does not have any immediate tax implications for shareholders. However, when bonus shares are eventually sold, the cost of acquisition of these shares is considered to be nil for the purpose of calculating capital gains tax. The period of holding for the bonus shares is calculated from the date of acquisition of the original shares.

Legal Provisions Governing Issuance of Bonus Shares to Preference Shareholders

The issuance of bonus shares to preference shareholders is governed by Section 63 of the Companies Act, 2013. The section provides that a company may issue bonus shares to its preference shareholders out of its free reserves or the securities premium account. The issuance of bonus shares must be approved by the company’s board of directors and shareholders.

Impact on Preference Shareholders

The issuance of bonus shares to preference shareholders has a positive impact on their investment. It increases their shareholding in the company without requiring any additional investment. Furthermore, bonus shares enhance the liquidity of the preference shares in the secondary market.

Reporting of Bonus Shares in the Financial Statements

When bonus shares are issued to preference shareholders, the transaction must be properly disclosed in the company’s financial statements. The company should show the details of the bonus issue, including the number of shares issued and the source of funds from which the bonus shares are issued.

Conclusion

Debentures, debenture stock, and deposit certificates are popular investment instruments that provide investors with an opportunity to earn interest and receive repayment of the principal amount at maturity. The tax treatment of interest income earned from these instruments is governed by the Income Tax Act, 1961. Additionally, the issuance of bonus shares to preference shareholders under dividend is regulated by the Companies Act, 2013. The issuance of bonus shares has a positive impact on preference shareholders and must be properly disclosed in the company’s financial statements. It is important for investors and companies to adhere to the legal provisions governing these investment instruments to ensure compliance with Indian law.