Hll & #39;S Bonus Debentures Okayed

The board of Hindustan Lever Ltd (HLL) today approved a scheme for the issue of bonus debentures of the face value of Rs 6 each in the ratio of one fully paid debenture for every Re 1 equity share held in the company.

The record date for the scheme would be fixed by the board after the plan is sanctioned by the Bombay High Court.

The debentures would be secured, and redeemable at par in two equal installments after the second and third year of the issue. The debentures would carry an interest rate of nine per cent per annum, payable annually. The liquidity factor of the debentures is being addressed by listing them on both the Bombay Stock Exchange and the National Stock Exchange.

 

Besides, those who hold less than 1,000 debentures can tender their debentures to the company at any time on a first-come-first-serve basis for repurchase at par. However, this repurchase would be to a maximum extent of Rs 100 crore in any year.

Responding to queries as to why the company resorted to the 'bonus debenture' route to return excess cash to its shareholders, the company management said that the scheme is equitable to each and every shareholder because every shareholder receives one debenture for every equity share held in the company.

A buy-back issue, for instance, would not have been equitable to every shareholder because not all shareholders would have been able to dilute their holdings. Besides, a buy-back would be a long-drawn process and would have accounted for only around three per cent of HLL's equity.

A cash dividend was ruled out because a company (under the Companies Act) cannot pay dividend out of general reserves unless it has incurred a loss or there is inadequacy of profits. Since neither of these is the case with HLL, a special dividend could have been paid only under a court scheme.

Apparently, the company also considered the option of reducing the face value of its Re 1 shares to a lower amount and returning the differential amount to shareholders with a suitable premium.

According to the company, this scheme would have been both tedious and administratively cumbersome, and besides there was no benefit in altering the share capital structure of the company. An issue of bonus shares would not have resulted in any outflow of cash to shareholders, and hence was not considered.

The bonus debenture scheme, on the other hand, has the benefit of retaining cash for any business opportunity that may come up within the defined time frame of three years, by which time the debentures would be redeemed. Further, the company's cash flow generation from operations (which stood at Rs 1,188 crore so far this year) would easily be available to replenish the company's cash position by the end of the third year.

Moreover, since the issue would be made by drawing upon the general reserves of the company, the scheme would significantly increase return on equity and reduce average cost of capital, besides improving the efficiency of the balance sheet in terms of the excess cash carried by the company for several years.