When Capital Allocation Strategy overrides Conventional Approach

Why would a company issue bonus preference shares instead of the more familiar bonus equity shares? The answer is simple. It is driven by control, tax, and corporate strategy — not optics or investor sentiment. When a company chooses bonus preference shares, it signals calculation, not convention.

For most companies, bonus equity shares are the easier route. They involve an internal reallocation of reserves to share capital, with no cash outflow or new liability. The process is straightforward: it signals confidence, improves stock liquidity, and makes shares more affordable. For promoters, bonus equity preserves ownership and keeps control intact. For investors, it feels like “free” stock — the higher share count and reset cost base can be used for tax management and market signalling. These advantages make bonus equity shares the default choice.

Yet a few companies have taken a more unconventional path. They have issued bonus preference shares, typically as Non-Convertible Redeemable Preference Shares, or NCRPS. These hybrid instruments carry fixed pay-outs, a maturity date, and sometimes a call option for early redemption. 

The attraction lies in their design: issuers preserve near-term cash; promoters maintain control; and shareholders gain a tradable, fixed-income instrument. 

Though it may vary on specific NCRPS structure, tax treatment is favourable. They are treated as “deemed dividends” under the Income Tax Act, 1961, with taxation at redemption, giving shareholders flexibility.

That rarity itself tells a story — only about five companies have used this route in the last two decades. 

Each case reveals a different strategic balancing act: preserving cash, avoiding equity dilution, and still delivering shareholder value. Issue sizes have ranged from ₹190 million, as in Sun Pharma’s case in 2002, to nearly ₹200 billion when Zee Entertainment experimented in 2014. Face values are usually ₹1 or ₹10, and coupons cluster around 6 or 9%. Most have been cumulative, though Zee’s 12-year non-cumulative version proved that flexibility is possible. Call options allowed early redemption in some instances, preserving balance-sheet control. The issue ratios have varied widely, from 4:1 to 116:1, showing how each structure was custom-built for its purpose. All have been credit-rated and listed, a sign of transparency even within complexity.

The issuers themselves read like a study in pragmatism. 

Sun Pharma’s 2002 NCRPS allowed partial redemptions and a later buyback at ₹1.03 per share. In a phase of rapid expansion and controlled leverage, it rewarded shareholders while preserving promoter control, offering predictable, debt-like returns to retail investors. 

A decade later, Zee Entertainment, with promoter holdings down to 3%, issued 12-year non-cumulative NCRPS that provided investors returns without diluting equity and allowed redemption over five instalments. Siyaram Silk Mills, in 2024, marked its golden anniversary by rewarding shareholders through the simultaneous issue of two NCRPS series — three-year and five-year — reflecting both prudence and generosity. Around the same time, Sundaram-Clayton, as part of a group restructuring, used the instrument deftly and demonstrated execution discipline by redeeming well before maturity. TVS Motor’s recent move, echoing its holding company’s example, adopted a one-year NCRPS to conserve cash, maintain promoter control, and deliver shareholder value. Across these cases, the intent was discipline over display.

Regulatory Constraint
That discipline is also forced by regulation. The Companies Act, 2013, through Section 55, allows only redeemable preference shares, which must be paid back within 20 years (30 for infrastructure companies), using profits or new issue proceeds. But Section 63, which governs bonus issues, recognises only equity shares. This means a company cannot simply pass a board resolution to issue bonus preference shares. It must instead navigate the cumbersome Scheme of Arrangement route under Sections 230 to 232 — requiring NCLT hearings, shareholder and creditor approval, SEBI and exchange clearances, listing, disclosure, and usually a credit rating.

That complexity carries both cost and consequence. Though redemption obligations are deferred, they still represent a future cash outgo. The legal and procedural demands make these instruments expensive to issue and rare to repeat. Only companies with long horizons and strong internal cash generation can afford such patience.

Despite differences in size, sector, and intent, one thread runs through most issuers: strong promoter holdings above 50%. The lone outlier, Zee Entertainment, used the instrument largely for optics, signalling balance-sheet strength rather than control.

Ultimately, NCRPS bonus issues are about discipline and design — balancing growth, liquidity, control, and shareholder reward while carrying redemption risk. They may look like investor-friendly largesse, but they are really a form of restraint. Equity bonuses are about confidence, while preference bonuses are about strategy.