NCRPS are preference shares that cannot be converted into equity and must be redeemed by the issuer at a future date through cash payout to the holders. This makes them an attractive hybrid instrument combining fixed income features with corporate flexibility.
A Rare Bonus Issue Variant
While listed entities frequently issue equity shares as bonus shares, issuance of non-convertible preference shares as bonus shares remains rare. However, a few notable precedents do exist:
Recently, TVS Holdings again approved a fresh scheme (September 2025) for issuing NCRPS as bonus — signaling a renewed corporate interest in adopting this route of shareholders incentivization.
What does Companies Act, 2013 says?
Under Section 63 of the Companies Act, a company may issue fully paid-up bonus shares to its members out of free reserves, securities premium account or capital redemption reserve account. The section also mandates board and shareholder approval for bonus issuances. Notably, the Act uses the term “shares” rather than restricting the scope to “equity shares”. As per Section 2(84) (“share”) read with Section 43 (which deals with kinds of share capital), share capital includes both equity and preference share capital. Hence, the Act neither prohibits nor expressly limits bonus issuance of equity shares alone. This supports the view that preference shares, including NCRPS, may be issued as bonus shares under Section 63.
Whether a Scheme of Arrangement indeed is Required?
Although the Companies Act allows bonus issuance of any class of shares, certain companies, such as TVS Motor and Siyaram, opted for an NCLT-approved scheme of arrangement under Section 230 for enhanced governance and transparency. Their disclosures did not suggest any statutory compulsion for doing so. However, a closer look at some of the sectoral regulations reveals why some companies may prefer or require this route:
- Under Foreign Exchange Management (Debt Instruments) Regulations, 2019 (DI Regulations), RBI classifies listed NCRPS as debt instruments. Regulation 6 allows Indian companies to issue NCRPS to non-residents by way of bonus only if approved under a scheme of arrangement sanctioned by NCLT. Hence, where foreign shareholders are beneficiaries of bonus issuance, a scheme route is mandatory.
- Under SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, SEBI does not define NCRPS as “debt securities” but provides for a similar treatment of NCRPS as that of other non-convertible securities.
It is noteworthy that past issuances of bonus debentures (e.g., Britannia, NTPC, Blue Dart, Dr. Reddy’s) were also implemented through schemes of arrangement since Section 63 applies only to “shares”. Thus, while NCRPS structurally resemble debt, they remain shares under the Companies Act – creating a subtle regulatory overlap.
A Subtle but Strategic Tool
Issuance of NCRPS as bonus shares represents an innovative shareholder incentivization mechanism – rewarding investors without immediate cash outflow (unlike dividends) and without diluting equity ownership. It also provides shareholders a potential yield through preferential dividend or redemption premium. Nevertheless, a regulatory grey zone still persists on whether NCLT approval is mandatory in all cases. In the absence of express clarity, using the scheme route, as followed by TVS Motor and TVS Holdings, provides legal comfort and ensures alignment with both corporate and exchange control laws.
As Indian companies increasingly explore hybrid return structures – from bonus debentures to NCRPS issuances – the line between capital reward and financial engineering continues to blur, demanding sharper regulatory guidance and a consistent judicial treatment.
(Shah and Gupta respectively are Partner and Senior Associate with IC RegFin Legal, Mumbai. Views are personal.)