Write short notes on the following: (i) Bonus debentures

Companies which have adequate build-up of reserves and surplus can issue debentures to the existing shareholders, free of cost, redeemable at the end of stipulated period as bonus debentures. Such debentures shall be eligible for interest at stipulated rate, payable periodically as spelt out in the scheme. The debenture could be listed in any stock exchange to provide liquidity to the owner of the debenture. The companies Act does not contain any provisions relating to issue of bonus debentures. Hence the scheme shall be an arrangement to be approved by the shareholders, SEBI, MCA, Tribunal and RBI. Therefore, the process of issue of bonus debentures could be time consuming. The major advantages of the scheme are- There is no dilution in equity value, as in the case of bonus share and hence the promoters would welcome the scheme. As equity gets reduced due to transfer of reserves to debentures, the return on equity could improve. The interest payable on debentures would be an expense deductible for the purpose of tax by the company. However, the company has to pay dividend distribution tax as this will be considered as deemed dividend and the individual will also be subject to tax on deemed dividend if the value of debentures allotted exceeds ₹ 10 lakhs. The interest on debentures receivable by the owners of the debentures will be taxable as interest income.