“Dive into the world of corporate finance with our guide on Bonus Shares and Right Issues as per Companies Act 2013. Explore the intricacies, regulatory provisions, and accounting treatments for a comprehensive understanding. Navigate the financial landscape efficiently for the benefit of both companies and shareholders.”
Introduction: Engaging with the intricacies of corporate finance is an essential aspect of understanding how companies manage their capital structure. Two crucial mechanisms governed by the Companies Act 2013 are bonus shares and right issues. These instruments play a significant role in the financial landscape, impacting both companies and their shareholders. In this comprehensive guide, we will delve into the provisions of the Companies Act 2013, supplemented by insights from the Companies (Amendment) Act 2020, to unravel the processes of issuing bonus shares and conducting right issues. Additionally, we’ll explore the accounting treatment associated with these transactions, shedding light on the financial implications for companies and the benefits for shareholders.
Bonus Shares and Right Issue as per Companies Act 2013 and Companies (Amendment) Act 2020
Section 63 of the Companies Act 2013 outlines the conditions under which a company can issue fully paid-up bonus shares to its members. These bonus shares can be drawn from free reserves, the securities premium account, or the capital redemption reserve account. However, it’s crucial to note that reserves created by the revaluation of assets cannot be capitalized for issuing bonus shares.
Authorization and Compliance: Before a company can capitalize its profits or reserves for issuing fully paid bonus shares, it must adhere to specific conditions. These include authorization by the company’s articles, approval in a general meeting, and compliance with financial obligations such as interest or principal payments on fixed deposits and debt securities. Additionally, any outstanding partly paid-up shares must be made fully paid-up, and the company must meet conditions prescribed by regulatory authorities. Please note The bonus shares shall not be issued in lieu of dividend.
I. Extract of Section 63 of Companies Act, 2013
Section 63.Issue of bonus shares
(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.
II. Accounting Treatment
The accounting treatment for fully paid bonus shares depends on whether they are issued at par or at a premium. When issued at par, various reserve accounts such as Capital Reserve, Securities Premium Reserve, and General Reserve are debited, and a corresponding credit is made to the Bonus to Shareholders account. If the bonus shares are issued at a premium, the Securities Premium Reserve, Capital Redemption Reserve, Sinking Fund, General Reserve, and the Statement of Profit and Loss accounts are debited, while the Bonus to Shareholders account is credited.
A. When fully paid bonus shares are issued.
1. When issued at par.
a. Declaration of bonus out of reserve
Capital Reserve A/C….Dr.
Securities Premium Reserve A/C….. Dr.
Capital Redemption Reserve A/C…. Dr.
Debenture Redemption Reserve A/C…Dr.
General Reserve A/C ……. Dr.
Statement of Profit and Loss A/C… Dr.
To Bonus to Shareholders A/C
(On the declaration of bonus out of reserve)
b. Entry for issue of bonus shares
Bonus to Shareholders A/C… …Dr.
To Share Capital A/C
(On issue of bonus shares)
2. When bonus shares are issued at premium.
a. Declaration of bonus out of reserve
Securities Premium Reserve A/C………..Dr.
Capital Redemption Reserve A/C…. ….. Dr.
Sinking Fund A/C ………….Dr.
General Reserve A/C ………..Dr.
Statement of Profit and Loss A/C…….Dr.
To Bonus to Shareholders A/C
(On the declaration of bonus out of reserve)
b. Entry for issue of bonus shares at premium
Bonus to Shareholders A/C… …Dr.
To Share Capital A/C
To Securities Premium Reserve A/C
(On issue of bonus shares at premium)
When fully paid bonus shares are issued to existing shareholders, they get additional shares without paying cash.
B. When Bonus is given to convert partly paid shares into fully paid shares
i. Capital Reserve A/C…… Dr
Debenture Redemption Reserve A/C…..Dr
General Reserve A/C…… Dr
Statement of Profit and Loss …….Dr
To Bonus to Shareholders A/C
(On the declaration of bonus out of reserve A/C)
ii. Share Final Call A/C …..Dr
To Share Capital A/C
(On making final call money due)
iii. Bonus to Shareholders A/C ….Dr
To Share Final Call A/C
(On utilization of Bonus)
Right Shares.
Section 62 of the Companies Act 2013 comes into play when a company proposes to increase its subscribed capital through the issue of further shares, known as right shares. These shares must be offered first to existing equity shareholders in proportion to their paid-up share capital. The offer of right shares comes with specific conditions, including a notice specifying the number of shares offered and a time frame for acceptance. Shareholders have the right to renounce their shares in favor of others. If the offer is declined, the company’s Board of Directors has the discretion to dispose of the shares in a manner not disadvantageous to the shareholders and the company.
Extract of Sub-section (1) of Section 62 of Companies Act, 2013
Section 62. Further issue of share capital
(1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered-
a. to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:-
i. the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days or such lesser number of days as may be prescribed and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;
ii. Unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause(i) shall contain a statement of this right;
iii. after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not disadvantageous to the shareholders and the company.
Provided that notwithstanding anything contained in sub-clause (i), in case of a Specified IFSC public company, the periods lesser than those specified in the said sub-clause shall apply if ninety per cent. of the members have given their consent in writing or in electronic mode.
(b) to employees under a scheme of employees’ stock option , subject to special resolution passed by company and subject to such conditions as may be prescribed; or
(c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed.
SEBI (ICDR) Regulations, 2018.
An issuer offering specified securities of aggregate value of fifty crore rupees or more, through a rights issue shall satisfy the conditions of Chapter III of SEBI (ICDR) Regulations, 2018 at the time of filing the draft letter of offer with the SEBI and also at the time of filing the final letter of offer with the stock exchanges, as the case may be.
Entities not eligible to make a rights issue [Section 61]
The Companies Act specifies conditions under which an issuer is not eligible to make a rights issue. This includes instances where the issuer, its promoters, or directors are debarred from accessing the capital market by SEBI, or if any of them is a fugitive economic offender.
Extract of Section 61 of Companies Act, 2013
Section 61. Power of limited company to alter its share capital
(1) A limited company having a share capital may, if so authorised by its articles , alter its memorandum in its general meeting to—
(a) increase its authorised share capital by such amount as it thinks expedient;
(b) consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares:
Provided that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner;
(c) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;
(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;
(e) cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.
(2) The cancellation of shares under sub-section (1) shall not be deemed to be a reduction of share capital.
Conclusion:
In conclusion, navigating the landscape of bonus shares and right issues requires a deep understanding of the Companies Act 2013 and its amendments. Accounting for these transactions involves meticulous entries, ensuring transparency and compliance. While bonus shares offer companies a way to reward shareholders and utilize reserves efficiently, right issues provide a mechanism for raising capital from existing shareholders. Both instruments contribute to the overall financial health of a company and its relationship with shareholders. By comprehending the regulatory framework and accounting intricacies, stakeholders can make informed decisions, fostering a robust financial ecosystem.
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