Bhagwati Developers v. Peerless General Finance and Investment Co. (2005) 69 CLA 288 (SC).

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The Bhagwati developers case comes into the picture to reach a conclusion regarding whether the bonus shares can be issued out of the Revaluation Reserve of the company. Article 182(1) of the Articles of Association of the company was discussed to reach an appropriate conclusion. The clause mentioned read that any amount standing in the credit of Shares Premium Account or Capital Redemption Account or any amount forming a part of the undivided profits of the company including profits forming part of realization account can be used for issue and distribution of fully paid up shares, stocks, debentures, and bonds, etc. It specifically mentions that any amount standing to the credit of Capital Redemption Reserve can be utilized to issue fully paid Bonus Shares to the existing shareholders and members. Aggrieved by the decision of the Division Bench of the Calcutta High Court, the appellant filed an appeal before the Supreme Court of India. 

Facts of the case

The respondent company is an Investment company. The Reserve Bank of India had been authorised through a previous judgement of this court to issue directions on the respondents in order to provide stable, identifiable and monitor able method of operation. The Court permitted the Bank for the same, considering that it would provide security to the depositors and it would easily be able to monitor the accounts of the company. The Court held that the directions issued by the Bank are helpful for the depositors and the respondent company as well in the long run. One important direction issued by the bank is that the respondent company will show the depositors’ money as “liability” instead of “income” in their Balance Sheet. Therefore, the respondents became liable to transfer Rs. 217.34 crores to the Depositors A/c by debiting the Profit & Loss A/c with Rs. 217.34 crores. The Bank issued a letter directing the respondent to prepare their Balance Sheet in conformity with the directions issued, however respondents did not immediately followed the directions and took a long time to show that money as liability.

The respondent company further issued a notice to increase the capital of the company from Rs. 3 Crores to Rs. 35 Crores in the Annual General Meeting of the company. The additional details mentioned in the notice are that the respondent company relying upon Article 182(1) of Articles of Association of the Company decided to appropriate a sum of Rs. 31,08,36,00/- out of credit of the Revaluation Reserve and issue Bonus Shares in favour of the members who are equity shareholders. A person having single equity share will be allotted 15 bonus shares in its favour. It shall be treated as an increase in the nominal amount of capital of the company and not as the income. The Bonus Shares so allotted should be in conformity with Memorandum and Articles of Association of the company and the guidelines issued by SEBI in favour of Bonus Shares. All the Bonus Shareholders would be given an equal amount of dividend as provided to any other ordinary shareholder at the end of the financial year. Subsequently, the appellant filed the case for cancelling the impugned notice and to object the resolution passed at the meeting. The present appeal has been filed against the judgement of the Calcutta High Court to stop the respondent company to issue Bonus Shares.


  • Whether the respondent company are authorised to issue Bonus Shares out of the Revaluation Reserve.
  • Whether the notice issued for issuing of Bonus Share was valid or not and the Annual General Meeting held was appropriate.
  • Whether the judgement delivered by the Division Bench of Calcutta High Court justified with an appropriate reasoning.

Contentions from both the sides


  • The learned Counsel for appellant contended that the Bonus Shares issued by the respondent company is contrary to the guidelines laid down by SEBI.
  • The Counsel further submitted that the issue made is not in adherence to the Circular issued by the department of Company Affairs.
  • The Counsel also asserted that the said issue is against the Article 182 of the Articles of Association of the company.


  • The learned Counsel for respondent contended that the words “available for dividend” apply to only those funds which are available in the hands of the company.
  • The Counsel also submitted that it has completely relied upon the provisions mentioned in the Articles of Association of the company to issue these Bonus Shares. 

Summary of the judgement

The honorable court in Bhagwati Developers case while delivering its judgment opined that the issue of Bonus Shares was not contrary to the SEBI guidelines as the respondent company is not a listed company, therefore, it depends upon its choice to follow the rules laid down by the SEBI. The court also made the observation that the circular passed by the Company Affairs does not have a mandatory effect; it is only advisory in nature. The court relied upon the Article 182(1) while delivering the judgment that any amount standing in the credit of capital redemption reserve and securities premium reserve can be used by the company to issue shares, bonds, stocks, debenture, and Bonus shares, etc. The court further mentioned that the definition of “dividend” includes “Bonus”, therefore it implies the funds “available for dividend” are the same as funds “available for bonus”. Article 182 specifies that if the legislation requires the payment of bonuses from the increased value it should be done. Article 182 authorizes the company to issue Bonus shares out of reserves arising from the revaluation of capital assets. Thus, even though the interpretation given by the High Court on Article 182 is not correct, still the final conclusion that Article 182 does not prohibit issuance of Bonus shares is correct and requires no interference. The honorable Supreme Court of India stated that the judgement delivered by the Division Bench was justified; however, the reasoning behind the judgment was inappropriate. The Court also made a reference of Section 205(3) which allows the capitalization of a company’s profits or reserves for the purpose of issuing fully paid Bonus Shares.


The honorable Supreme Court’s judgment in Bhagwati Developers case was not different from the judgment given by the High Court; however, the reason delivered by it differs. The court relied on the submission that has been made before it that Article 182 allows the capitalization of the surplus by issuing fully paid-up shares, bonds, debentures, and bonus shares out of the Revaluation of the Capital Assets specifically when the “funds are available for dividends”. There a special mention was made in the regard that funds available for dividend include all categories of funds which could be capitalised whereas funds not available for this purpose cannot be used.  Further, the reliance was placed upon Article 175 which says that no dividend is paid out of the profits which do not arise from the business of the corporation. It is to be considered that both the Articles 175 and 182 have to be read together to make it clear that dividends as well as the issue of fully paid-up shares could only be made out of profits arising from the business of the company and not from the revaluation of capital assets. The decision of the court was in conformity with Section 205(3) of the Companies Act, 1956, and the provisions of Memorandum and Articles of Association of the company. The honorable court in Bhagwati Developers case relied on certain judicial precedents laid down while delivering the judgment. The court justified its decision and asked the respondent to issue Bonus Shares out of the Revaluation Reserve. Also, the Annual General Meeting and impugned notice issued by the respondent company is pertinent and of utmost significance.   


In the Bhagwati Developers case, the court held that if the articles so permit; a company could issue bonus shares by capitalizing revaluation reserves. Articles provides that, in order to resolve this Bhagwati decision, no issue of Bonus Shares shall be made by capitalizing reserves generated by the revaluation of assets. The Supreme Court in Bhagwati Developers case was of the opinion that the judgment delivered by the Division Bench was valid but the reasoning provided by them was not appropriate. The funds which are available for dividend include all sorts of categories and monies available instead of a specific category i.e. the funds which are only in the hands of the company.

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