The Securities and Exchange Board of India (SEBI) is considering imposing additional preconditions for listed companies to issue bonus shares. The market watchdog set out prerequisites in a consultation paper.

Currently, bonus issues are governed by Section 63 of the Companies Act, 2013 and Chapter XI of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). The Companies Act 2013 sets out specific conditions for issuing bonus shares from a company’s free reserve, securities premium or capital redemption reserve accounts. In addition, ICDR regulations impose other requirements.

The market watchdog has observed that, in some cases, a company has announced the issuance of bonus shares. Its previously issued shares have not yet been approved in principle by the stock exchange for listing and trading, so the draft for comments has been issued. Such controversial prior offerings have been held up for failing to comply with pricing guidelines or regulatory requirements. In this case, the bonus shares issued by the company cannot be approved in principle to be listed and traded on the exchange.

A mismatch exists between the issuer’s listed and issued capital in such cases. Because of the mismatch between issued and listed shares, it will be difficult for stock exchanges to approve bonus issues in principle unless the discrepancy is resolved.

To complicate matters further, approving such bonus share offerings will further exacerbate the mismatch between the issuer’s listed and issued capital. “Therefore, in such circumstances, it would be unwise to grant bonus shares for past incorrect issuances,” the filing said.

As such, it recommends that “a listed issuer shall only be eligible to announce its bonus issue if it has obtained the stock exchange’s approval-in-principle for the listing of all pre-bonus securities”.

The regulator pointed out that if there is a mismatch between listed capital and issued capital, “the issuing company may not be considered eligible to announce a bonus issue (as) the announcement of a bonus issue is price-sensitive information that must be paid promptly.”