The Ratio-Distortion Problem
An NCLT scheme fixes a share exchange ratio as at the appointed date. If either the transferor or the transferee announces a bonus issue between the appointed date and the effective date, the ratio is distorted. A shareholder who held one transferor share and was promised one transferee share now holds two transferor shares after the bonus, but remains entitled to one transferee share under the unadjusted ratio. The economic bargain shifts against that shareholder.
Market-standard scheme documents address this through an express adjustment clause. Typical language provides that if either company restructures its equity share capital by way of share split, consolidation, or issue of bonus shares during the pendency of the scheme, the share exchange ratio and the stock options “shall be adjusted accordingly to take into account the effect of any such corporate actions.” The clause is not boilerplate; it is the mechanism that preserves the ratio’s economic integrity.
The Timing Discipline
The adjustment must be applied before the record date for the allotment of transferee shares. The transferee’s board resolution approving the allotment should record the original ratio, the corporate action, the adjustment factor, and the revised ratio. Where the bonus issue is announced by the transferor, the adjustment increases the number of transferee shares issuable per transferor share; where it is announced by the transferee, the adjustment reduces the number of transferee shares issuable per transferor share.
A scheme that lacks an adjustment clause leaves the parties to negotiate a revised ratio after the NCLT order, which may require a fresh application to the Tribunal. The cleaner course is to include the clause in the scheme at the drafting stage and to obtain the NCLT’s sanction for the adjustment mechanism as part of the scheme.
The SEBI Interface for Listed Companies
For a listed transferor or transferee, the bonus issue during scheme pendency must comply with the SEBI (Issue of Capital and Disclosure Requirements) Regulations and the LODR. The stock exchange’s no-objection letter to the scheme may record the adjustment mechanism. The listed entity must disclose the corporate action and its effect on the scheme ratio under Regulation 30 of LODR, and the disclosure should be made before the record date.
Where the bonus issue is proposed after the NCLT order but before the allotment, the company should consider whether the scheme permits a post-sanction corporate action. A scheme that is silent on post-sanction adjustments may require the transferee to approach the NCLT for a modification, adding months to the timeline.
The Documentation
The file should contain: the scheme’s adjustment clause; the board resolution approving the bonus issue; the revised ratio computation; the record date notice; the stock exchange disclosure; and the allotment resolution recording the adjusted ratio. A scheme file that contains the original ratio but not the adjustment working is incomplete for any post-implementation audit.
Call to Action: For bonus-issue adjustment drafting in a scheme, ratio recalculation, or SEBI disclosure coordination, contact Anuj Desai & Associates at office@anujdesaiassociates.com or 9619456656. Website: https://anujdesaiassociates.com. LinkedIn: linkedin.com/in/ca-anuj-desai-122547230.