Bonus Preference Shares Through NCLT Scheme Permissible for Listed Company: NCLT

Can a Listed Company Give Bonus Preference Shares Through an NCLT Scheme? A Plain-Language Guide to the Siyaram Silk Mills Ltd. Order under Section 230

Summary: Siyaram Silk Mills Ltd., whose equity shares are listed on BSE and NSE, proposed a Scheme of Arrangement with its shareholders under Section 230 of the Companies Act, 2013. The Board approved the Scheme on 26 October 2024. Under the Scheme, each holder of 1 fully paid equity share of face value Rs. 2 would receive, free of payment, 4 Series-I and 3 Series-II preference shares, each of face value Rs. 10, fully paid up and carrying a 9% dividend. Series-I preference shares would be redeemed within 3 years and Series-II within 5 years. The NCLT had earlier directed meetings of equity shareholders and unsecured creditors on 4 November 2025; those meetings were held on 29 December 2025 and the required majority approved the Scheme. A meeting of secured creditors was dispensed with because the secured creditors had already given written consent. Notices under Section 230(5) were sent to the relevant authorities. The Regional Director raised eleven points, including protection of creditors and employees, accounting treatment, requisite majority, consistency of Scheme documents, statutory notices, the Appointed Date, regulatory directions, tax and GST rights, Section 2(1B) of the Income-tax Act, stock-exchange observations, and compliance with Sections 63, 55 and 42. The Company gave written undertakings addressing the observations. BSE issued its Observation Letter on 11 July 2025 and NSE on 7 July 2025. The Tribunal found the Scheme fair and reasonable, not contrary to law or public interest, and made the Company Petition absolute, approving the Scheme with the Effective Date as the Appointed Date. The Tribunal directed filing of the certified order and Scheme with the Registrar of Companies through e-Form INC-28 within 30 days, submission to the Superintendent of Stamps within 60 days for stamp-duty adjudication, compliance with all undertakings, and completion of the statutory steps for implementation, including allotment and Form PAS-3 filing. The Income Tax Department remained free to examine the Scheme separately for tax avoidance and take action under the Income-tax Act, 1961.

Short Answer

A listed company can give new preference shares to its existing equity shareholders completely free of cost, as a bonus, funded out of its general reserves. But this can only be done through a Scheme of Arrangement approved by the NCLT under Section 230 of the Companies Act, 2013 — not through a simple resolution under Section 63, since Section 63 only covers bonus issues of the same class of shares a member already holds.

In the Siyaram Silk Mills Ltd. case, the company proposed to give every equity shareholder 4 Series-I and 3 Series-II preference shares (face value Rs. 10 each, carrying a 9% dividend, redeemable after 3 years and 5 years respectively) for every 1 equity share (face value Rs. 2) held, by using its general reserves. The NCLT approved the scheme only after checking that the shareholder and creditor meetings were properly held, that formal notices were sent to every authority that had to be told, that the stock exchanges (BSE and NSE) had no objection, and that every concern raised by the Regional Director was answered through specific, written promises by the company. Even after approval, the Income Tax Department was left completely free to separately check whether the scheme was, in substance, a way of avoiding tax.

Facts of the Case

Siyaram Silk Mills Ltd. (“the Company”) manufactures, brands and markets fabrics, readymade garments and indigo-dyed yarn. Its equity shares are listed on both the BSE and the NSE. The Company proposed a Scheme of Arrangement between itself and its shareholders under Section 230. Its Board approved the Scheme on 26 October 2024.

The reason the Company gave the Tribunal was simple: it had built up surplus reserves well beyond what its business currently needed or was likely to need soon, and it wanted to reward shareholders by giving away part of that surplus — while still keeping enough cash to pay its lenders and other obligations. Under the Scheme, every shareholder holding 1 fully paid equity share of face value Rs. 2 would receive, free of any payment, 4 Series-I preference shares and 3 Series-II preference shares, each of face value Rs. 10, fully paid up, carrying a 9% dividend and to be listed on the stock exchanges. Series-I shares would be repaid (“redeemed”) within 3 years of being issued, and Series-II shares within 5 years.

The Company followed the standard two-stage process that every NCLT scheme goes through. First, on the Company’s request, the Tribunal (by an earlier order dated 4 November 2025) directed that meetings be held of the equity shareholders and the unsecured creditors, to vote on the scheme. The meeting of secured creditors was not required, because those creditors had already given their written consent (called a “consent affidavit”) in advance. The shareholder and creditor meetings were held on 29 December 2025, and the person who chaired those meetings (the “Chairperson”) reported back to the Tribunal that the Scheme was approved by the required majority. Formal notices under Section 230(5) were then sent to every authority likely to be affected, and the Company filed its final petition (called a “Company Petition”) asking the Tribunal to give its final approval. No one objected before the Tribunal, and no fact stated in the petition was disputed.

Applicable Legal Provisions

– Section 230, Companies Act, 2013 — the main provision that lets a company reach a compromise or arrangement with its members or creditors. This only becomes legally binding once the NCLT sanctions it.

–  Section 230(5) — before the Tribunal hears the scheme, notice of it must be sent to every authority likely to be affected: the Central Government (through the Regional Director), the Registrar of Companies, the Income Tax Department, the GST Department, SEBI, the stock exchanges, sector regulators, and others, inviting their comments.

– Section 230(6) — a scheme is treated as approved once a majority in number, representing three-fourths in value, of the members or creditors present and voting (whether in person or otherwise) agree to it at the meeting.

– Section 230(9) — the Tribunal may skip holding a meeting for a class of creditors where creditors holding at least 90% in value have already given their written consent by affidavit. This is exactly why the secured creditors’ meeting was not held in this case.

– Section 63 — lets a company give fully paid-up bonus shares to its members out of free reserves, the securities premium account, or the capital redemption reserve (but never out of a reserve created by simply revaluing assets upward on paper). This is mentioned because it is the ordinary route for a bonus issue, even though this particular bonus — a new class of preference shares — was routed through Section 230 instead.

– Section 55, read with Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014 — sets out the terms and conditions on which a company may issue preference shares, since the Scheme creates and allots an entirely new class of preference shares.

– Section 42 — the private-placement provision requiring a company to file a “return of allotment” in Form PAS-3 with the Registrar of Companies within the prescribed time after allotting any securities, including these preference shares.

– Regulation 37, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, read with the SEBI Master Circular dated 20 June 2023 — requires a listed company to get a No-Objection (called an “Observation Letter”) from the stock exchanges on the draft scheme before filing it with the NCLT. (This 2023 Master Circular has since been folded into SEBI’s wider, regularly-updated LODR Master Circular, so the exact reference should be re-checked against the current version before being relied on again.)

– Section 2(1B), Income-tax Act, 1961 — defines “amalgamation” (two or more companies merging into one) for income-tax purposes. It is mentioned here only to record that a bonus issue of preference shares is not an “amalgamation”, so this definition and its conditions simply do not apply.

– MCA General Circular No. 09/2019 (File No. 7/12/2019-CL-I), dated 21 August 2019 — explains how a scheme’s “Appointed Date” (the date from which the scheme is treated as legally effective) must be fixed and reported. In this case, the Scheme used the Effective Date itself as the Appointed Date, in line with this circular.

How the Scheme Was Structured — Giving Preference Shares as a Bonus

Clause 4 of the Scheme said that, once the Scheme came into effect, the Company would issue and allot, to every equity shareholder recorded in its register (or in the depository’s electronic records) on the Record Date (the cut-off date used to decide who is eligible), 4 Series-I preference shares and 3 Series-II preference shares (each of face value Rs. 10, fully paid up, carrying a 9% dividend) for every 1 equity share of face value Rs. 2 held. Series-I shares would be redeemed within 3 years, and Series-II shares within 5 years.

The Scheme made clear that this allotment would happen automatically under the Tribunal’s approval itself — the Company or its shareholders would not need to do anything further — and that a shareholder’s vote in favour of the Scheme would itself count as their consent to receive the preference shares. The shares were to be issued in electronic (“dematerialised”) form; where a shareholder’s electronic-account details were not available by the Record Date, the shares would be held in trust for that shareholder until the paperwork was completed. Importantly, this bonus issue did not involve the Company handing over any existing money or property to shareholders — no cash or asset left the Company at the time of issue. New preference shares were simply created out of the reserves already sitting on the Company’s books.

The Regional Director’s Report and the Company’s Promises

Before approving any scheme, the Tribunal calls for a report from the Regional Director, who represents the Central Government. How the company answers this report usually decides how smoothly the scheme gets approved. In this case, the Regional Director (Western Region), Mumbai, raised eleven specific points, and the Company answered each one with a written promise (called an “undertaking”). The table below sets these out in plain language — read carefully, it is essentially a checklist of everything a company must be ready to confirm before a Section 230 scheme can be approved:

On the strength of these promises, the Regional Director’s representative told the Tribunal that the explanation given was satisfactory, and that the Central Government had no objection to the Scheme.

How the Tribunal Decided the Matter

The Tribunal noted that no one had objected, and that no fact stated in the Company Petition had been challenged. Based on this, and after going through the Regional Director’s report and the Company’s written promises, the Tribunal held that the Scheme looked fair and reasonable, did not break any provision of law, and was not against public interest. Since every required legal step had been completed, the Tribunal made the Company Petition final (in legal language, “absolute”), approving the Scheme of Arrangement with the Appointed Date fixed as the Effective Date of the Scheme.

Having approved the Scheme, the Tribunal then gave a set of follow-up directions that every practitioner should note — because these are the compliance steps that actually come after a favourable order. The order itself is only the halfway point, not the end of the job:

– File a certified copy of the order, along with the Scheme, with the jurisdictional Registrar of Companies. This must be done electronically through e-Form INC-28 (in addition to a physical paper copy), within 30 days of receiving the order.

– Submit a certified copy of the order and the Scheme to the concerned Superintendent of Stamps, so that any stamp duty payable can be assessed (“adjudicated”), within 60 days of receiving the certified order.

– Keep every promise made to the Tribunal — the responses summarised in the table above are not just submissions made to get the order passed; they are now binding obligations on the Company.

– Take every further step required under the Companies Act, 2013 to actually put the Scheme into effect — including, in this case, allotting the preference shares under Sections 63 and 55 read with Rule 9, and filing the return of allotment in Form PAS-3 under Section 42.

Importantly, the Tribunal also left the door open for the Income Tax Department to independently check whether the Scheme results in tax avoidance, and to take whatever action the Income-tax Act, 1961 allows if it finds that this is the case. This is a point that trainees often miss: an NCLT sanction settles whether the arrangement is valid under company law, but it does not settle, or shut out, its tax consequences — those remain open to separate examination by the tax authorities.

Practical Interpretation — The Compliance Roadmap

Setting aside the case-specific facts, the Siyaram Silk Mills order lays out the standard sequence any professional would follow for a listed (or unlisted) company that wants to give a bonus in the form of a new class of shares through a Section 230 scheme:

– Get Board approval for the Scheme, backed by a clearly written commercial reason (typically: reserves beyond what the business needs, while still keeping enough resources to meet liabilities).

– For a listed company, get the stock exchanges’ No-Objection (Observation Letters) under Regulation 37 of the SEBI LODR Regulations before filing the scheme application with the NCLT.

– File a Company Application under Section 230(1) asking the Tribunal to direct meetings of the affected classes of members and creditors. Use Section 230(9) to skip the meeting for any class (typically secured creditors) where 90% value-consent is already on record.

– Hold the meetings the Tribunal ordered, get approval by the required majority under Section 230(6), and file the Chairperson’s report on the outcome.

– Send formal notices under Section 230(5) to the Regional Director, Registrar of Companies, Income Tax and GST authorities, sector regulators and other concerned bodies, and file proof that these notices were actually delivered.

– File the Company Petition asking for final approval, and answer the Regional Director’s report with specific, verifiable promises rather than vague assurances — as the table above shows.

– Once a favourable order is received: file e-Form INC-28 with the Registrar within 30 days; approach the Superintendent of Stamps for duty assessment within 60 days; and then complete the actual allotment paperwork (Sections 63, 55, Rule 9) along with the Section 42 return of allotment in Form PAS-3.

A word of caution for trainees: none of these steps can be skipped or rushed simply because the Board and shareholders are all in agreement. The Tribunal’s comfort in this case came specifically from every one of these boxes being ticked and properly documented — not from the commercial logic of the proposal on its own.

A Simple Example

Suppose ABC Textiles Ltd., an unlisted public company, has built up large free reserves over several profitable years and wants to reward its shareholders — without paying out cash dividend, and without diluting control through a rights issue. It proposes to give 2 redeemable preference shares of Rs. 10 each, as a bonus out of general reserves, for every 1 equity share held. Since this creates a brand-new class of security and hands it out for free — rather than a routine equity bonus under Section 63 — ABC Textiles would follow the same broad path as Siyaram Silk Mills: Board approval, a Section 230 application to convene meetings, the meetings themselves, formal notices under Section 230(5), a Regional Director report answered with written promises, and finally a Company Petition for approval. Being unlisted, it would simply skip the stock-exchange No-Objection step that a listed company must complete.

Conclusion

Siyaram Silk Mills Ltd. is a useful, recent, real example of how the NCLT actually applies Section 230 to a bonus issue of preference shares — and of just how many different rulebooks a single scheme must satisfy at once: the Companies Act, SEBI’s Listing Regulations, MCA circulars, and even the Income-tax Act. The order is also a reminder that getting the Tribunal’s approval is not the finish line. The real compliance work — Registrar filings, stamp-duty assessment, allotment paperwork, and honouring every promise made to the Tribunal — follows after the order is passed. For a fresher or trainee professional, the Regional Director’s list of observations in this order is, in effect, a ready checklist of what any Section 230 scheme petition must be able to answer before it can expect a favourable order.

FAQs

Q1. Can a company give bonus preference shares directly under Section 63, without going to the NCLT?

A. Section 63 is the ordinary way to turn free reserves into fully paid bonus shares, through a Board and shareholder resolution, with no outside body checking the process. Where a company wants to create and hand out an entirely new class of security — such as listed preference shares — to its equity shareholders for free, the safer, more complete route (as followed in this case) is a Tribunal-approved Scheme of Arrangement under Section 230, since it brings creditor protection, government notice, and stock-exchange clearance together within one supervised process.

Q2. Why was the secured creditors’ meeting not held in this case?

A. Under Section 230(9), the Tribunal can skip the meeting for a class of creditors where that class, holding at least 90% in value, has already given its consent in writing (by affidavit). Since the Company’s secured creditors had already given such consent, their meeting was skipped by the Tribunal’s earlier order directing the meetings.

Q3. Does the NCLT’s approval mean the Income Tax Department can no longer question the scheme?

A. No. The Tribunal specifically kept this door open — it recorded that the Income Tax Department remains free to check whether the scheme is, in substance, a way of avoiding tax, and to take whatever action the Income-tax Act, 1961 allows if that turns out to be true. Company-law approval and tax treatment are examined separately, by separate authorities.

Q4. Which form is used to file the sanction order with the Registrar of Companies?

A. e-Form INC-28, filed electronically along with a certified copy of the order and the Scheme, in addition to a physical paper copy, within 30 days of receiving the order — as directed at paragraph 16.1 of the order.

Q5. Is a separate SEBI approval needed, or is the stock exchanges’ No-Objection enough?

A. For a scheme of this kind, the requirement under Regulation 37 of the SEBI LODR Regulations, read with the applicable SEBI Master Circular, is satisfied once the stock exchanges issue their Observation Letters (which already build in SEBI’s own comments, as recorded in this case). A separate, stand-alone approval directly from SEBI is not additionally needed.

Q6. What exactly did shareholders receive, and when do they get their money back?

A. For every 1 equity share of face value Rs. 2, a shareholder received 4 Series-I preference shares and 3 Series-II preference shares, each of face value Rs. 10, fully paid up and carrying a 9% dividend. Series-I shares are to be redeemed (repaid) within 3 years of allotment, and Series-II shares within 5 years — so shareholders get a fixed yearly return plus a promised repayment date, in place of receiving new equity shares that carry no fixed return or repayment at all.

Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [[email protected]](mailto:[email protected])).

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