Bonus shares from revaluation reserve permitted where articles and statute allow capitalization of reserves.

SEBI guidelines did not apply to existing private, closely held and other unlisted companies, so they did not bar issuance of bonus shares from revaluation reserve. The Department of Company Affairs circular dated 6 September 1994 was advisory, not mandatory, and therefore did not create an independent legal restraint. Article 182 of the articles of association, read as a whole and in light of section 205 of the Companies Act, did not prohibit capitalization of revaluation reserve for bonus shares where the statute permitted such capitalization. The company's authority to issue bonus shares from revaluation reserve was therefore not excluded by the cited guidelines, circular, or article.

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Issues: (i) Whether the SEBI guidelines and the Department of Company Affairs circular dated 6 September 1994 barred the company from issuing bonus shares out of revaluation reserve; (ii) Whether Article 182 of the articles of association prohibited capitalization of revaluation reserve for issue of bonus shares.

Issue (i): Whether the SEBI guidelines and the Department of Company Affairs circular dated 6 September 1994 barred the company from issuing bonus shares out of revaluation reserve.

Analysis: The SEBI clarification stated that the guidelines did not apply to existing private, closely held and other unlisted companies, and therefore the company was outside their scope. The departmental circular was held to be advisory in character and not mandatory.

Conclusion: The SEBI guidelines were inapplicable and the circular did not create a legal bar to the issue of bonus shares.

Issue (ii): Whether Article 182 of the articles of association prohibited capitalization of revaluation reserve for issue of bonus shares.

Analysis: Article 182 had to be read as a whole, and the words relating to funds available for dividends governed the categories mentioned in the clause. The article also contemplated bonus issues where permitted by law, and the statutory scheme under Section 205 of the Companies Act allowed capitalization of reserves for issue of fully paid bonus shares. Even though the High Court's construction of Article 182 was not accepted in full, the clause did not prohibit bonus shares out of revaluation reserve.

Conclusion: Article 182 did not bar issuance of bonus shares from revaluation reserve.

Final Conclusion: The challenge to the company's authority to issue bonus shares failed, and no ground was made out for appellate interference.

Ratio Decidendi: Where the statute permits capitalization of reserves for bonus shares and the company's articles do not expressly prohibit it, bonus shares may be issued from revaluation reserve; advisory circulars and inapplicable guidelines do not create an independent restraint.

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