1. On this originating summons, the question that needs to be determined is as follows :
'Whether the defendant company having made a bonus issue in proportion of 2 : 5 (40%) to its equity shareholders is, under the terms of clause (d) under the head 'Options' of the principal terms of the prospectus dated 14-8-1980 issued by it, bound and liable to give to the plaintiff, who holds sixty-five bonds, issued by it pursuant to the said prospectus a reduction of Rs. 90 (40%) in the conversion price of Rs. 225 per equity share fixed in the said prospectus.'
2. The plaintiff's case is that on or about August 14, 1980, the defendant issued a prospectus offering to the public 5,35,500 100% convertible bonds of Rs. 450 each for cash at par on the terms set out therein. The terms, inter alia, provided as follows :
'4. Value :
The bonds will have a face value of Rs. 450 each.
Each bond carries a right to receive two ordinary shares of Rs. 100 each of the company at a price of Rs. 225 as per following terms :
(a) The first option to receive one share will be available within three months after the expiry of three years from the date of allotment.
(b) The second option to receive one share will be available within three months immediately preceding the expiry of seven years from the date of allotment and will be exercisable even if the first option was not exercised.
(c) On the exercise of each option, the face value of the bond will be reduced by Rs. 225 and this amount, which will be due to the bond holder, will be applied towards the price of one fully paid ordinary share of Rs. 100 each of the company at a premium of Rs. 125. Thus, there will be a constructive receipt of Rs. 225 by the bond holder and constructive payment of the same amount by the bond holder to the company towards the price of one fully paid ordinary share.
(d) If the company makes any bonus issue prior to respective dates for exercising option, the price of Rs. 225 per share will stand proportionately reduced by the same lower amount. However, the number of shares which can be obtained will remain the same, viz., two per bond. The balance sum of the capital will be repaid to the bond holder on the date of maturity, viz., at the end of seven years'.
3. The defendant company through the aforesaid issue raised an amount of Rs. 47 crores. In so far as the plaintiff was concerned, he was allotted 13 bonds of the face value of Rs. 450 each. However, at present, he holds in all 65 bonds of the face value of Rs. 450 each. That in or about July, 1981, the defendant company announced a bonus issue in the proportion of 2 : 5 to the shareholders of the defendant company and at the same time announced a reduction of Rs. 64.30 per option share of the shareholders. The conversion price of each option share was announced at Rs. 160.70.
4. It is the plaintiff's case, that since the defendant company had made a bonus issue at the ratio of 2 : 5, the proportionate reduction expressed in arithmetic unity must mean 225 x 2 = 450 divided by 5 = 90 or 2/5 of Rs. 225 which is Rs. 90. That in or about July, 1981, the plaintiff wrote to the defendant company disputing the defendant's construction of cl. (d) (see para. 2 above) and setting out what, according to him, would be the proper interpretation and calculation. In reply, the defendant company sent to him a letter dated September 21, 1981, addressed by them to the Bombay Shareholders' Association, who had also raised a similar dispute. In the said letter, the defendant company has pointed out that the defendant's approach to the subject-matter was correct but the plaintiff has contended that the word 'proportionate' can only mean equality of relationship between two sets of numbers. That if this is accepted, then cl. (d) under the head 'Options' can only be read as put forth by the plaintiff. The plaintiff has also contended that it would be obligatory on the part of the defendant to set apart a sum of Rs. 200 out of the face value of the bond of Rs. 450 towards fulfilment of the company's obligations under the 'principal term' and then derive a method to achieve a reduction under the head 'Options', as otherwise, the whole scheme must result in contradictions. It is the plaintiff's case that it is in these circumstances he has filed the suit for the reliefs set out in the plaint.
5. The plaintiff's case is, of course, resisted by the defendant, and the latter have contended that the approach of the plaintiff is wholly illogical and that their approach to the subject is wholly correct and the plaintiff would be entitled to no relief.
6. The controversy hence lies in a narrow compass, viz., keeping in view the announcement of the bonus issue in proportion of 2 : 5, what is the construction to be placed on cl. (d) (reproduced above). In this context, what needs to be examined is as to what are the mechanics of issuing a bonus share. In Pennington's Company Law, fourth edition, at page 371, it has been observed as under :
'The mechanics of issuing bonus shares or debentures are similar to those of issuing shares or debentures subscribed for in cash. After the necessary resolution for the capitalisation of profits or reserves has been passed, certificates in respect of the bonus shares or debentures are issued to the members entitled to them, and appropriate entries are made in the register of members or debenture holders. Alternatively, if the bonus shares are to be renounce able for a period, letters of allotment or renounce able certificates are issued in the first instance. Because private companies must place effective restrictions on the free transferability of their shares, there is nothing to prevent them from issuing such documents in respect of bonus debentures.
The practical advantage of bonus issues are :
(a) They enable the company to retain money required for its business which it would otherwise have to raise by issuing new shares or debentures on the market or by borrowing;
(b) The market value of the company's shares is reduced to a figure nearer nominal value, and this makes them more seleable. But a bonus issue increases the total market value of a shareholder's holding only marginally; he merely has more shares of a correspondingly lower value each.
(c) formerly bonus shares and debentures were not treated as income in the hands of the recipient shareholder, and he did not have to pay income-tax or surtax on their value. This was so even if the resolution to capitalise profits gave the shareholders an option to take a cash dividend instead. But income-tax is now payable if a company issues redeemable preference shares or debentures as a bonus issue, whether on a capitalisation of profits or reserves or otherwise, but not to the extent that the nominal value of the new shares is provided out of share premium account. Moreover, when the shares or debentures are redeemed, the company is treated as though it were paying a cash dividend equal to the amount paid on redemption (except any amount paid up on the securities out of share premium account), and so the company pays advance corporation tax on the redemption payment, and it is treated as part of the income of the holders of bonus securities for income-tax, but the tax which has already been paid on the issue of the bonus shares is allowed as a credit against the income-tax payable on redemption.'
7. Note 6 reads as follows :
'6. If a company has an issued capital of Pounds 1,00,000 in ordinary shares of Pounds 1 each, and reserves of Pounds 50,000, and the market value of its shares is Pounds 1.50, a capitalisation of the shares on the basis of one bonus shares for each two shares already held will reduce the market value of each share to Pounds 1 or a few pence more. Each shareholder will now have three shares worth about Pounds 1 each instead of two shares worth Pounds 1.50 each. These observations are true, of course, only if the bonus shares are ordinary shares.'
8. Bearing these principles in mind and turning to the subject-matter, what must be apparent is that the consequences of this bonus issue must be that the number of shares would increase and must bring down (proportionately) the value of the shares, irrespective of as to whether the value is the market value, the book value, the intrinsic value or the notional value fixed for conversion. The phrase 'proportionate reduction' cannot admit of different connotations for each or any of the values mentioned above in the event of a bonus issue. The distinction must necessarily be worked out looking to the ratio the number of bonus shares bears to the increased number of shares after the bonus issue, and it is a condition of proportionate reduction. The reduction must be such that the figures, after reduction, are in proportion. The plaintiff's stand proceeds on the basis that proportionate reduction means a reduction of the same percentage, a position to my mind, which is wholly untenable. In view of this, the method adopted by the defendant company cannot be faulted. The plaintiff's contention must, hence, be rejected.
9. What is more is that by the method adopted by the defendant, a shareholder and a bond holder would be placed on a footing of equality, as is evidence from the calculations, set out in appendix 2, the plaint. These calculations are not challenged.
10. In view of this, the question must now be answered in the negative. The summons must stand dismissed. There will, however, be no order as to costs on the summons.