Mumbai: Hindustan Lever Ltd (HLL) is convening a meeting of shareholders on 9 August 2002 to approve the scheme of arrangement for the issue of secured fully-paid bonus debentures and for the payment of special dividends. The meeting is held as per a Bombay High Court order.

A meeting of the secured creditors will also be on 10 August 2002 to approve the scheme of arrangement for the issue of secured fully-paid bonus debentures and payment of special dividend. HLL says the scheme formulated by the company for the 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 a member has been approved by an overwhelming majority of the members at a court convened meeting held on 12 December 2001 subject to the approval of the Bombay HC.

But the Finance Bill 2002, as approved by both houses of the Parliament, has made significant changes to the tax laws. The bonus debentures construed as "deemed dividend" for tax purposes will now be taxable at the hands of the members entitled to the same and the company will, therefore, have the obligation to make tax deduction at source at rates prescribed for varying classes of shareholders.

In the circumstances, the board at its meeting held on 20 May 2002 resolved to make certain changes to the scheme with a view to ensure that the promised benefits are indeed made available to the members in a fair and equitable manner, in the light of the revised tax regime.

As per the revised scheme, the face value of the bonus debentures at Rs 6 and the ratio of issue (one bonus debenture of Rs 6 each for every equity share of Re 1 held by the members by utilising the general reserves of the company) are being retained. The interest on debentures has been retained at 9 per cent per annum payable in arrears. The general reserve will, however, not be debited to the extent of approximately 1,350 million, being dividend distribution tax payable @ 10.2 per cent on "deemed dividend" as contemplated in the original scheme since dividend distribution tax is no longer applicable.

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 6,080 million.

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 and loss account balance, which as of 31 December 2001 stands at Rs 7,599.80 million. 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 4,730 million.

Tax deduction at source at applicable rates (varying from nil to 31.5 per cent) will be made from the bonus debentures constituting deemed dividend and on the quantum of special dividends, treating the two as an integrated transaction involving payout of deemed dividends/special dividends, 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, per entire TDS on Rs 8.76 per share will be made from the special dividend of Rs 2.76 per share.

The balance of special dividends, if any, will be paid to the members. All members will be able to discharge their tax liability on the bonus debentures and special dividends both in terms of TDS and the advance tax payment from and out of the quantum of special dividends.

The debentures will 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.

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 dividends.