Siyaram Silk Mills “Special Reward” to Shareholders – Shall Issue Preference Shares as Bonus Shares

Recently Siyaram Silk Mills Limited announced issuance of compulsorily redeemable preference shares as a “bonus” to all the equity shareholders.

Siyaram Silk Mills Limited (“The Company” or SSML”) is engaged in the business of manufacturing, branding and marketing of fabrics, readymade garments and indigo dyed yarn. The equity shares of the Company are listed on the nationwide bourses.

Proposed Transaction:

As Siyaram’s embarks on the pathway to its golden anniversary three years hence, the Board of Directors of the Company has proposed a special reward for its shareholders. As part of this process, the Company has announced the issuance of cumulative non-convertible redeemable preference shares (“CNCRPS”) by way of a bonus to all equity shareholders through a Scheme of Arrangement (“Scheme”). The issue size will be ₹ 318 Cr and will be issued from the general reserves/retained earnings of the Company.

Please note that the company will issue two types of CNCRPS for every 1 equity share:

• 4 (Four) Preference Shares – Series I of the face value of INR 10 each fully paid up for every 1 (One) equity share of INR 2 each fully paid up held by such shareholder; and
• 3 (Three) Preference Shares – Series II of the face value of INR 10 each fully paid up for every 1 (One) equity share of INR 2 each fully paid up held by such shareholder.

Terms of Preference Shares

Basically, the only difference between is Series I CNCRPS & Series II CNCRPS will be redeemed at the end of 3rd & 5th year respectively. This must have planned considering the availability of sufficient cash flow with the company for redemption.

Rationale for Issuance of Preference Shares:

• Over the years, the Company has built up substantial surplus reserves from its profits. The surplus reserves are well above the Company’s current and likely future business needs.
• The company is of the view that these excess funds can be optimally utilized to reward its shareholders.

The Preference Shares will be a listed security and will give flexibility to the equity shareholders and the Company in managing its liquidity until redemption by way of secondary sale. As scheme is for the issuance of preference shares as bonus, the appointed date is selected as the Effective Date. 

Companies Act, 2013 provision for issuance of Preference Shares as bonus shares:

The Company proposes issuance of Preference Shares by way of bonus to its equity shareholders under Section 230 of the Companies Act which will be subject to necessary statutory, regulatory and corporate approvals.

Shareholders Return:

In last few years, SSML has rewarded its shareholders continuously. It is paying consistent dividend since its listing.

Cumulatively, the company will issue 31,85,90,616 CNCPRS to all the shareholders which shall entails total outflow of Circa INR 318 at time of redemption plus dividend.

Why Preference Shares:

As reported by the company, the special scheme has been approved to reward shareholders on its golden anniversary which is three years away. The redemption of series 1 preference shares will fall in the year of its third anniversary. It will also provide an option to shareholder to cash out early by way of secondary sale once CNCRPS are listed on nationwide bourses. Further, unlike buyback the preference shares will have no extinguishment of equity share capital & will have no limit. Also, tax treatment like to be different basis it is redeem or sold in open market after listing. 

Direct Tax Consequences:

As per the Income Tax Act, 1961 the issue of preference shares as a bonus is covered under “deemed Dividend” which will be taxable in the hands of shareholders.

However, one needs to ponder on when the same will be taxable and what if the same is sold before redemption.  As provided in the scheme, the issue of such a bonus to equity shareholders does not involve any release of assets by the Company to shareholders at the time of issuance of Preference Shares by way of bonus. Similar view has been taken by various other companies who did issued bonus preference shares in the past. Thus, it is likely that the tax will be on the date when the preference shares are redeemed by the company. The prevailing tax will be deducted by the company while redeeming the said preference shares.

However, one can argue different tax treatment if the CNCRPS are transferred by way of secondary sale on exchange. Then it is likely to be treated as capital gains and tax rate will change accordingly.

Accounting Treatment:

The Company shall credit its share capital account in its books of account with the aggregate face value of the Preference Shares issued by way of bonus & will debit its general reserves in its books of account with the aggregate face value of the Preference Shares issued pursuant. Basically, equivalent amount will get transferred from general reserve to preference share capital.

FEMA Perspective:

Regulation 6 of the Foreign Exchange Management (Debt instruments) Regulations, 2019 (“FEMA Debt Regulations”) has permitted Indian companies to issue non-convertible redeemable preference shares to non-resident shareholders including by way of distribution as a bonus from its general reserves under a scheme of arrangement approved by the Tribunal in India under the provisions of the Act, subject to prescribed terms and conditions. One of the pre-conditions for issuance is that the scheme shall be approved by the Hon’ble National Company Law Tribunal which becomes compulsion to issue preference shares as bonus through NCLT approved scheme only.

Conclusion

The proposed scheme achieves rewarding equity shareholders to mark the celebration of golden anniversary which is after three years at same time provides cushion to the company for arranging the requisite funds within stipulated timeline. The bonus issue has been divided in two tranches with two different redemption dates as per availability of funds for redemptions. Due to likely differential tax treatment, shareholders need to plan to achieve optimal benefits.