Bonus Share Issuance: Regulations, Process & Benefits

Issue and Listing of Bonus Shares

Section 63 of Companies Act, 2013
read with
Section 23 of Companies Act, 2013
and
Rule 14 of Companies (Share Capital and Debenture) Rules, 2014
and
CHAPTER XI: Regulation 293 – 295 of SEBI (ICDR) Regulation, 2018

 Issue of bonus shares is a way of capitalising profits or certain reserves of the company. This is done by issuing additional shares to existing shareholders without any consideration.

Bonus issue is merely a book entry. Then why issue bonus shares?

• To capitalize reserves of the company.
• A way of distributing profits to shareholders.
• Can be used as an alternative to dividend payment. However, bonus shares cannot be issued in lieu of dividend.
• Infuses liquidity for the company’s shares in the market.
• Helps boost investor confidence.
• Does not involve any cash movement.

Bonus can be issued out of –

• Free reserves where Companies Act defines free reserves as 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;

• Securities Premium as per section 52 of Companied Act, which states that where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account”.
• Capital Redemption Reservee. a reserve created by transferring an amount equal to the nominal value of its own shares purchased by the company, out of free reserves or securities premium account, under section 69 of Companies Act. This reserve can only be used to issue fully paid up bonus shares.
• Bonus shares cannot be issued out of reserves created by the revaluation of assets.

Conditions for issue of bonus shares-

 Under Companies Act

• Such issue is permissible under the AOA of the company.
• Recommended by Board of Directors and approved by shareholders of the company, in case of unlisted issuer.
• Only fully paid up shares to be issued under bonus issue.
• The bonus shares shall not be issued in lieu of dividend.
• The issuer has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it.
• The issuer has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus.
• The partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up.
• The company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same.

Additional conditions under ICDR for Listed Issuers

• Any of the issuer’s promoters or directors are not fugitive economic offenders.
• The issue has received approval from the stock exchanges for listing and trading of all the securities, excluding options granted to employees pursuant to an employee stock option scheme and convertibles securities, issued by the issuer prior to the issuance of bonus shares.
• Bonus shares by listed entity shall be made out of securities premium account only where the same is collected in cash.

Process for issue and listing of bonus shares

Pre-issue

• Check if the limit of the authorised capital of the company is enough to accommodate the bonus issue. If not enough, then first authorised capital to be increased in General Meeting of shareholders under the Companies Act.
• Check if bonus issue is permissible under AOA of the company. If not, the same need to be amended first to include bonus issue provisions.
• Check if the position of free reserves, securities premium and CRR as per latest audited financial statements is adequate for issue of proposed bonus shares and in case of listed company, for reserve of bonus shares for convertible securities.
• Check if there is any default in payment of interest or principle for any debt or deposit.
• Check of any default in payment of statutory dues of the employees.
• Check if all existing shares are fully paid up.
• In case of listed entity, check if trading approval is received for all previous issues, except options granted to employees and convertible securities.
• In case of listed entity, check that promoters or directors are not fugitive economic offenders.

Issue Process for Unlisted Issuer

• Issue notice of Board Meeting.
• Pass Board Resolution in Board Meeting for the following,
• • Recommending bonus issue.
  • Calling of General Meeting.
  • Approving notice and Explanatory statement for General Meeting.
  • Authorizing filing of Form MGT-14 (not applicable in case of private company) and Form SH-7, if required.
  • Fixing of Record Date/ book closure dates for the issue, if required.
• Pass shareholder’s resolution in General Meeting, for the following,
  • Approving alteration of AOA to authorize increasing authorized capital of company, if required.
  • Approving increase in authorized capital, if required.
  • Approving amendment in Capital Clause of MOA, if required.
  • Approving alteration of AOA to provide for capitalizing of free reserves and profit of the company, if required.
  • Approving bonus issue via Ordinary Resolution.
• File the resolution/s passed in Form MGT-14 within 30 days of passing of resolution.
• File Form SH-7 intimating alteration of share capital to ROC within 30 days of passing of resolution, if applicable.
• Pass Board Resolution for following,
  • Approving allotment via bonus issue.
  • Authorizing filing of Form PAS-3 and Form FC-GPR, if applicable.
  • Authorizing Corporate Action/ issue of share certificates in case of physical shares.
  • Authorizing making entries in Register of Members.
• Execute Corporate Action/ issue share certificate in case of physical shares.
• File Form PAS-3 within 30 days of allotment.
• File Form FC-GPR within 30 days of allotment, in case of foreign holders.
• Make necessary entries in the Register of Securities in Form MGT-1.

Issue Process for Listed Issuer

Issue notice of Board Meeting.

• Prior intimation to Stock Exchange of the meeting of Board of Director for approving issue of bonus shares atleast 2 working days in advance (excluding date of intimation and date of meeting) under Regulation 29 of LODR.
• Pass Board Resolution in Board Meeting for the following
  • Approving bonus issue.
  • Calling of General Meeting, if any.
  • Approving notice and Explanatory statement for General Meeting, if any.
  • Authorizing filing of Form MGT-14 (not applicable in case of private company) and Form SH-7, if required.
  • Fixing of Record Date for the issue.
• Intimation of result of Board Meeting to Stock Exchange within 30 minutes of conclusion of the meeting under Regulation 30 of LODR. Following details to be disclosed under circular issue by SEBI,
  • Source of issue
  • Bonus Ratio
  • Pre and post capital
  • Free reserves required and available for implementing the issue
  • Estimate timeline by which shares will be credited to investor’s demat account.
• Apply for In principle approval to Stock Exchange under Regulation 28 of LODR within 5 days of Board Meeting.
• Pass resolution in General Meeting of shareholders, if required.
• Disclosure of proceedings of General Meeting to Stock Exchange under regulation 30 of LODR.
• Record date (T day) intimation to Stock Exchange under Regulation 42 of LODR atleast 7 working days before the record date (excluding the date of intimation and the record date) along with deemed date of allotment being the next working date of the record date (i.e T+1 day).There should be a time gap of atleast 30 days between two record dates.
• File the resolution/s passed in Form MGT-14 within 30 days of passing of resolution.
• File Form SH-7 intimating alteration of share capital to ROC within 30 days of passing of resolution, if applicable.
• Pass Board Resolution for following,
  • Approving allotment via bonus issue.
  • Authorizing filing of Form PAS-3 and Form FC-GPR, if applicable
  • Authorizing Corporate Action.
  • Authorizing making entries in Register of Members.
• Submit documents to depositories for credit of bonus shares latest by 12 P.M. of next working day of the record date (i.e. deemed allotment date)
• Execute Corporate Action.
• Obtain Certificate from Statutory Auditors / Practicing Chartered Accountant / Practicing Company Secretary to the effect that the SEBI (ICDR) Regulations, 2018 for bonus issue has been complied with.
• Obtain final listing and trading approval from Stock Exchange. Trading will start on the 2^nd working day post record date (i.e T+ 2 days).
• File Form PAS 3 within 30 days of allotment.
• File Form FC-GPR within 30 days of allotment, in case of foreign holders.
• Make necessary entries in the Register of Securities in Form MGT-1.
• Make disclosures on website of the company under regulation 46 of LODR.

Restriction under ICDR for Listed Issuers

Allotment of bonus shares shall only be in the dematerialized form.

• Reservation of equity shares of the same class needs to be made in favour of the holders of outstanding convertible securities, if any, in proportion to the convertible portion.
• The equity shares so reserved, shall be issued to the holder of such convertible debt instruments or warrants at the time of conversion of such securities, as the case may be, on the same terms or same proportion at which the bonus shares were issued to others.
• If an issuer has issued SR equity shares to its promoters or founders, any bonus issue on the SR equity shares shall carry the same ratio of voting rights compared to ordinary shares.
• The SR equity shares issued in a bonus issue shall also be converted to ordinary equity shares having voting rights same as that of ordinary equity shares along with existing SR equity shares.

(Where SR Equity shares, under Regulation 2(eeea) of ICDR, means the equity shares of an issuer having superior voting rights compared to all other equity shares issued by that issuer

Completion of issue

For unlisted company, completion timeline for bonus shares is not mentioned in Companies Act.

For Listed company,

• Where shareholders’ approval is not required for capitalisation of profits or reserves for making the bonus issue, there the bonus issue shall be implemented within fifteen days from the date of approval of the issue by its Board of Directors.
• Where the issuer is required to seek shareholders’ approval for capitalisation of profits or reserves for making the bonus issue, the bonus issue shall be implemented within two months from the date of the meeting of its board of directors wherein the decision to announce the bonus issue was taken subject to shareholders’ approval.

(here ‘implemented’ means the date of commencement of trading on Stock Exchange)

Stock Exchange Checklist –

• BSE Checklist for IPA- bseindia.com/downloads1/Bonus_PreIssue_checklist.zip
• BSE Checklist for final trading approval-

www.bseindia.com/downloads1/Bonus_PostIssue_checklist.zip

Conclusion-

In conclusion, bonus issue is a great way of capital management without cash movement. By way of bonus issue, the company can reward its existing shareholders with more shares, without diluting their percentage holding. It signals the investors that the company has strong reserves position. Further bonus issue process is also fairly simple to execute.

Disclaimer:–

The information provided is for educational purposes and should not be considered as professional advice. The author shall not be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.