HLL Proposes Changes To Bonus Debenture Scheme
20-05-2002 :
Post the Budget, HLL had said on February 28, 2002, that it would study the new tax regime and accordingly revise the Scheme.
As per the revised tax regime, bonus debentures construed as “deemed dividend” for tax purposes, would now be taxable at the hands of the shareholders, and the company will, therefore, have the obligation to make Tax Deduction at Source (TDS) at rates prescribed for varying classes of the shareholders. Changes are being proposed to the Scheme in the light of this particular requirement.
The Scheme, as originally formulated by the Company under Section 391 of the Companies Act and as approved by an overwhelming majority of HLL’s shareholders on December 12, 2001, entails issue and allotment of Bonus Debentures in the ratio of one fully paid Debenture of Rs.6 each for every share of Re.1 held by the members.
The salient features of the Revised Scheme are:
| 1. | The face value of the Bonus Debentures at Rs.6 and the ratio of issue, i.e. One Bonus Debenture of Rs.6 each for every equity share of Re.1 held by the members by utilising the General Reserves of HLL is being retained. |
| 2. | Similarly the interest on Debentures has been retained at 9% per annum payable in arrears, as in the Original Scheme. |
| 3. | The General Reserve will, however, not be debited to the extent of approximately Rs.135 crores, being dividend distribution tax payable @ 10.2% on “deemed dividend” as contemplated in the Original Scheme since dividend distribution tax is no longer applicable. |
| 4. | Instead the company, under the Scheme, intends to declare a Special Dividend of Rs. 2.76 for every share of Re.1 held by the members involving a payout of approximately Rs. 608 crores. This Special Dividend will be payable by reference to the same Record Date as may be fixed for allotment of Bonus Debentures and is proposed to be absorbed by the Profit & Loss Account Balance which as of December 31, 2001, stands at Rs. 759.98 crores.
Accordingly in comparison to the earlier Scheme, adjusting for the non-applicability of the dividend distribution tax, the Company is committing itself to an incremental outlay of about Rs. 473 crores. |
| 5. | Tax Deduction at source at applicable rates (varying from Nil to 31.5%) would be made from the Bonus Debentures constituting deemed dividend and on the quantum of Special Dividend, treating the two as an integrated transaction involving payout of deemed dividend/ Special Dividend aggregating to Rs. 8.76 per share of Re.1 each to the Members. While the face value of the Debentures will be uniform at Rs. 6.00, the entire TDS on Rs. 8.76 per share will be made from the Special Dividend of Rs. 2.76 per share. Balance of Special Dividend, if any, would be paid to the members. All members would be able to discharge their tax liability on the Bonus Debentures and Special Dividend both in terms of TDS and the Advance Tax payment from and out of the quantum of Special Dividend.
Shareholders stand to gain significantly in the Revised Scheme, as compared to the Original Scheme, if they are not liable to pay tax or fall in the lower tax brackets, who are typically small shareholders. They can gain as much as the entire Special Dividend quantum of Rs.2.76 per share. Almost half of HLL’s shareholders are small shareholders, with holdings below 150 shares. Even shareholders, who would have to pay tax, will not be required to pay any tax out of their own pocket. They can pay the entire tax out of the total quantum of Special Dividend. The Revised Scheme is therefore a self-financing one for tax-paying shareholders even in the highest bracket of taxation. |
| 6. | The Debentures would be redeemed after 18 months in one instalment instead of redemption in two equal instalments after 24 and 36 months as was originally proposed. This has been proposed in recognition of the fact that significant time has already elapsed since the Scheme was originally formulated. |
| 7. | The Grant price of the Options issued to the Management Employees will be reduced by Rs. 8.76 to reflect the exceptional nature of the payment. Further the Options will not qualify either for the Bonus Debentures or the Special Dividend. |
Other terms & conditions of the Original Scheme are proposed to be retained, subject to such other changes as the Board in its discretion may decide to implement to reflect the exceptional nature of the Scheme, in the light of changes proposed as above. Since the proposed changes are material and significant, the Revised Scheme would be presented as a new Scheme for consideration by the shareholders and the High Court of Bombay. The Original Scheme was pending approval of the High Court.
EXPLANATORY NOTE TO THE REVISED BONUS DEBENTURE SCHEME
HLL has revised its Original Bonus Debenture Scheme because shareholders are now liable to pay tax on dividends, depending upon the rate that is applicable to them as per their income. Therefore, the company will have to deduct tax at source.
Had the company not revised the Original Scheme, the face value of the debentures would have varied from shareholder to shareholder, depending on the TDS rate for different classes of shareholders. This would have complicated the issue.
In effect, HLL is issuing one Bonus Debenture of Rs.6 each per Re.1 share, as in the Original Scheme. It is also paying a special dividend of Rs.2.76 per Re.1 share, as an integral part of the Scheme. The Special Dividend of Rs.2.76 has been calculated, keeping in mind shareholders who are in the highest tax bracket of 31.5%.
The entire tax on the Bonus Debenture and the Special Dividend would be deducted out of the Special Dividend of Rs.2.76.
This will ensure that the face value of the Bonus Debenture will be uniform at Rs.6 for all shareholders.
More importantly, shareholders stand to gain significantly in the Revised Scheme, as compared to the Original Scheme, if they are not liable to pay tax or fall in the lower tax brackets, who are typically small shareholders. They can gain as much as the entire Special Dividend quantum of Rs.2.76 per share. Almost half of HLL’s shareholders are small shareholders, with holdings below 150 shares.
Even shareholders, who would have to pay tax, will not be required to pay any tax out of their own pocket. They can pay the entire tax out of the total quantum of Special Dividend. The Revised Scheme is therefore a self-financing one for tax-paying shareholders even in the highest bracket of taxation.
HLL will no longer pay the approximately Rs.135 crores, as envisaged in the Original Scheme, on account of the dividend distribution tax, which has been abolished. But it will pay Rs. 608 crores as Special Dividend. Therefore HLL’s incremental outlay will be approximately Rs.473 crores, and it will be out of HLL’s Profit & Loss Account Balance.
The amount on account of the Bonus Debentures of Rs.6 each per se remains the same at approximately Rs.1320 crores, and will be paid out of the General Reserves of the company, as envisaged in the Original Scheme.
India:
Hindustan Unilever Limited
Unilever House,
B. D. Sawant Marg,
Chakala, Andheri (E),
Mumbai - 400 099.
T: +91-22-39830000
F: +91-22-22871970
