Issue of Bonus Shares

Legal provisions of the Bonus Issue

Section 63 of the Companies Act, 2013 provides about ‘Issue of Bonus Shares’. It states that –

(1) A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of—

(i) its free reserves;

(ii) the securities premium account; or

(iii) the capital redemption reserve account:

Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets.

(2) No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares under sub-section (1), unless—

(a) it is authorised by its articles;

(b) it has, on the recommendation of the Board, been authorised in the general meeting of the company;

(c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;

(d) it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus;

(e) the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up;

(f) it complies with such conditions as may be prescribed.

(3) The bonus shares shall not be issued in lieu of dividend.

Rule 14 of Share Capital and Debenture rules states – the company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same.

Let us see definitions of different words used in Section 63 :

Section 2 (43) defines ‘free reserves’ as follows :

“free reserves” means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend:

Provided that—

(i) any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or

(ii) any change in carrying amount of an asset or of a liability recognised in equity, including

surplus in profit and loss account on measurement of the asset or the liability at fair value,

shall not be treated as free reserves;

section 2(55) “member”, in relation to a company, means—

(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;

(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;

(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository;

Sec 2(81) “securities” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).

If we carefully study the provisions under law and regulations, we can note certain basic parameters and important points for ‘Issue of Bonus Shares’. Those are :

1. There should be a provision in Articles of a Company to issue Bonus Shares / Capitalization of reserves. If it is absent, then pass a Special Resolution to make such provision in the Articles.
2. Issue of Bonus Shares can be done out of the free reserves based on the ‘latest audited’ balance sheet.
3. Bonus Issue is permitted to be made out of free reserves built out of genuine profits or share premium collected in cash. Reserves created by revaluation of fixed Assets are not permitted to be capitalized. Development Rebate Reserve, Investment Allowance Reserve are considered as free reserves.
4. Preference can be given to utilize Capital Redemption Reserves and Share Premium for the issue of bonus shares and then lastly free reserves so that free reserves can be made available for dividend payment.
5. If the company has defaulted in respect of the payment of statutory dues of the employees such as contribution of provident fund, gratuity, bonus, etc., no bonus issue will be possible.
6. Declaration of Bonus issue in lieu of dividend is not allowed.
7. Boards once recommends a Bonus Issue it cannot be backtracked by it.
8. Only a fully paid-up bonus share can be issued. Partly paid-up bonus shares cannot be issued.
9. Guidelines issued by SEBI must be complied with.
10. Care must be taken that the issue of bonus shares does not lead to total share capital more than the authorized share capital. Otherwise, the authorized capital must be increased by amending the capital clause of the Memorandum of Association.
11. If the company has availed itself of any loan from the financial institutions, prior permission is to be obtained from the institutions for the issue of bonus shares.
12. If the company is listed on the stock exchange, the stock exchange must be informed of the decision of the Board to issue bonus shares immediately after the Board Meeting.
13. Where the bonus shares are to be issued to the non-resident members, RBI reporting in specified format within prescribed time limit to be submitted.
14. It is important to note here that Issue of bonus shares does not entail release of Company’s assets. When bonus shares are issued/credited as fully paid up out of capitalized accumulated profits, there is distribution of capitalized accumulated profits, but such distribution does not entail release of assets of the company.

Procedure of issue of Bonus issue:

1. Call a Board Meeting to consider
2. increase in authorized capital (if required),
3. issue of bonus shares and
4. for taking necessary steps in that regard to convening the General Meeting, to pass an Ordinary or Special Resolution, if articles so require
5. Issue notices of General Meetings with Explanatory Statement.
6. Hold the General Meetings and pass the resolution.
7. File requisite Form with ROC.
8. Hold a Board Meeting or Committee Meeting, as authorized, to allot the Bonus Shares to eligible members.
9. File requisite Form for allotment of Bonus Shares.
10. Issue the share certificates and make necessary entries in various registers.
11. Report to RBI, if there are any NR / NRI shareholders.

If  you need the help and expertise of a company secretary for bonus shares, reach out to us.