Can a Company Issue Bonus Shares to Equity Shareholders When Its CCPS Are Partly Paid-Up?
Summary: The article explains that a company cannot issue bonus shares to its equity shareholders while any Compulsorily Convertible Preference Shares (CCPS) remain partly paid-up, even if the equity shares are fully paid. It states that Section 63(2)(e) of the Companies Act, 2013 requires all partly paid-up shares outstanding on the date of allotment to be made fully paid-up before a bonus issue can proceed, and that the term “shares” is not confined to the class receiving the bonus. Referring to Sections 2(84), 43 and 63, the article explains that CCPS continue to be preference shares until conversion and therefore fall within the scope of this condition. It outlines the applicable statutory provisions, notes that no exemption is available for private companies or other specified classes of companies from Section 63(2)(e), and states that there is no reported NCLT or NCLAT ruling directly on this issue. The article recommends first calling and receiving the unpaid amount on the CCPS, updating the register to reflect them as fully paid-up, and then proceeding with the bonus issue after satisfying the remaining conditions under Section 63(2).
The Issue in Brief
Every company that wants to reward its shareholders with bonus shares has to first clear a set of eligibility conditions laid down in Section 63(2) of the Companies Act, 2013 , and one of those conditions looks only at whether any partly paid-up shares are sitting on the company’s register, without asking who holds them. A company that has both equity shares and Compulsorily Convertible Preference Shares (CCPS) in its capital structure, where the equity is fully paid but the CCPS still carry an unpaid call, runs straight into this condition. The practical takeaway: the class of shares proposed to be issued as bonus is not what the law looks at , it looks at the company’s entire capital structure.
What the Law Says
No. A company cannot proceed with a bonus issue to its equity shareholders while its CCPS remain partly paid-up, even though the equity shares themselves are fully paid. Section 63(2)(e) conditions the company’s eligibility to capitalise profits or reserves for a bonus issue on there being no partly paid-up shares outstanding on the date of allotment , and the word “shares” here is not limited to the class receiving the bonus. The unpaid call on the CCPS must be received first; only then can the company move ahead with a bonus issue to its equity shareholders.
Applicable Legal Provisions
- Section 63(1), Companies Act, 2013 , permits a company to issue fully paid-up bonus shares to its members out of free reserves, the securities premium account, or the capital redemption reserve account, but never out of reserves created by revaluation of assets.
- Section 63(2), Companies Act, 2013 , lists the conditions that must all be satisfied before a company can capitalise its profits or reserves for a bonus issue: authorisation in the Articles of Association [63(2)(a)], shareholder authorisation by ordinary resolution on the Board’s recommendation [63(2)(b)], no default in payment of interest or principal on fixed deposits or debt securities [63(2)(c)], no default in statutory dues of employees such as provident fund, gratuity and bonus [63(2)(d)], all partly paid-up shares outstanding on the date of allotment made fully paid-up [63(2)(e)], and compliance with any further conditions prescribed by rule [63(2)(f)].
- Section 63(3), Companies Act, 2013 , bonus shares cannot be issued in lieu of a dividend.
- Section 2(84), Companies Act, 2013 , defines “share” as a share in the share capital of a company and includes stock; the definition draws no distinction between equity and preference share capital.
- Section 43, Companies Act, 2013 , recognises that the share capital of a company limited by shares consists of two kinds: equity share capital and preference share capital. Both are “share capital,” and units of both are “shares” for the purposes of the Act unless a specific provision says otherwise.
Relevant Extracts
Section 63(2)(e): “…the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up.”
Section 2(84): “share means a share in the share capital of a company and includes stock.”
Legal Position
Section 63(2) is structured as a set of cumulative eligibility gates , a company has to clear every one of them before it is permitted to capitalise reserves for a bonus issue at all. Clause (e) is one such gate, and it is phrased as a condition on the company’s eligibility, not as a restriction on a particular class of shareholders receiving the bonus.
Because “share” under Section 2(84) is not confined to equity share capital, and Section 43 treats preference share capital as one of the two limbs of a company’s share capital, a CCPS that has not been fully called up is a “partly paid-up share” for the purposes of Section 63(2)(e) in exactly the same way a partly paid-up equity share would be. The fact that the CCPS is compulsorily convertible does not change this , until conversion actually happens, it remains outstanding as a preference share on the company’s register.
This means the eligibility condition in clause (e) is triggered by the mere existence of any partly paid-up shares anywhere in the company’s capital structure, whether or not that class is the one proposed to receive the bonus. There is no half-way reading under which a company could argue that only its equity capital needs to be fully paid because only equity shareholders are getting the bonus , the statute does not draw that line.
Exemptions / Relaxations
The MCA’s private company exemption notifications (5 June 2015, as consolidated and updated by the notification dated 13 June 2017) exempt private companies from specified provisions of the Act, primarily around related-party transactions, deposits, managerial remuneration and certain procedural requirements. Section 63 does not appear in that list, and no separate notification exempts private companies, Section 8 companies, Small Companies, OPCs, or Specified IFSC companies from the eligibility conditions in Section 63(2), including clause (e). A private company therefore stands on exactly the same footing as a public company on this point , there is no relaxation to fall back on.
Case Laws / Professional Interpretation
There is no reported NCLT/NCLAT ruling directly on whether “partly paid-up shares” under Section 63(2)(e) extends to preference shares such as CCPS , the point has not been judicially tested. In the absence of a ruling, the position has to be worked out from the plain text of Sections 2(84), 43 and 63(2)(e) read together, and the broad, class-neutral reading set out above is the one consistently taken in professional practice, precisely because the statutory language gives no basis to read “shares” narrowly in this clause. Where a provision’s language is unqualified, the safer professional position is to give it its full, literal effect rather than assume an implied restriction that Parliament did not write in.
Practical Interpretation
For a company in this fact pattern , equity fully paid, CCPS partly paid , the compliance path is straightforward but has to be sequenced correctly:
- Step 1: Call up the unpaid amount on the CCPS in accordance with the terms of issue and the company’s Articles.
- Step 2: Receive the call money and update the register of members to reflect the CCPS as fully paid-up.
- Step 3: Only thereafter proceed with the bonus issue to equity shareholders, ensuring the remaining conditions in Section 63(2) , Articles authorisation, shareholder approval, no default on fixed deposits/debt securities, and no default on statutory employee dues , are separately satisfied.
Before making the call on the CCPS, check the CCPS subscription/shareholders’ agreement and the terms of issue themselves , some instruments fix a specific call schedule or tie the call to a conversion trigger. Section 63(2)(e) tells the company what the Companies Act requires; it does not override a contractual restriction on when the company is entitled to call the unpaid amount. If the instrument restricts an early call, that has to be resolved commercially with the CCPS holder before the bonus route becomes available.
Section 63 itself does not carry a dedicated penalty clause for contravention. Where a section of the Act does not prescribe its own penalty, Section 450 applies by default: a penalty of ₹10,000 on the company and every officer in default, with a further ₹1,000 per day for a continuing contravention, subject to a cap of ₹2,00,000 for the company and ₹50,000 for an officer in default (post the Companies (Amendment) Act, 2020 re-characterisation from fine to penalty). This figure should be verified against the Act as it stands on the date of advice before being quoted to a client, since general penalty provisions are periodically revised.
Example
XYZ Private Limited has 10,000 fully paid-up equity shares and 2,000 CCPS on which only ₹6 out of the ₹10 face value has been called and received. The Board wants to issue bonus shares to equity shareholders alone, out of free reserves, and the AOA and general meeting approvals are otherwise in place. Because 2,000 CCPS remain partly paid-up and outstanding, Section 63(2)(e) is not satisfied , the bonus issue cannot proceed until the remaining ₹4 per CCPS is called and received, even though the CCPS are not participating in the bonus at all.
Conclusion
The conservative and technically correct position is that a company cannot go ahead with a bonus issue to its equity shareholders while any class of partly paid-up shares , including CCPS , remains outstanding. Section 63(2)(e) is an eligibility condition tied to the company’s capital structure as a whole, not a restriction confined to the class of shares actually receiving the bonus, and nothing in Sections 2(84) or 43 supports reading “shares” narrowly in this clause. The unpaid call on the CCPS should be made and received first; the bonus issue can follow once that condition, along with the remaining conditions in Section 63(2), stands satisfied.
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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).
