CS Divesh Goyal
Impact of Companies Act- 2013 and Rules on Bonus issue of shares
BONUS SHARES, SECTION-63 OF COMPANIES ACT-2013
Definition: Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company’s accumulated earnings which are not given out in the form of dividends, but are converted into free shares.
Bonus shares is a book keeping transaction (because no cash changes hands), it capitalizes a part of reserves (retained earnings) to bring:
(1) Share capital more in line with the assets employed; and
(2) A high share price back to a more manageable amount, thus enhancing its market ability. Although the number of shares held by each shareholder increases, the value of the total shareholding remains the same as before the bonus issue. Also called scrip issue, bonus shares, or capitalization issue.
The concept is similar to a rights issue, except that bonus shares are created by transferring money from a company’s reserves into its equity capital (capitalization of reserves). This is useful for a company that is already flush with cash and wishes to capitalize some of its liquid assets.
Companies issue bonus shares to encourage retail participation and increase their equity base. When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared.
For example, the company may give one bonus share for every five shares held. These are company’s accumulated earnings which are not given out in the form of dividends, but are converted into free shares.
There was no specific section under the Companies Act, 1956 dealing with Bonus Shares that Table A contains provision relating to capitalization of profits. Companies were following the norms prescribed by the Controller of Capital issues. Once SEBI came into existence and controller of Capital issues were abolished, unlisted Private Limited Companies and Public Limited Companies were free to issue Bonus Shares if there were sufficient reserves to match the issue of Bonus Shares.
To bring in sanctity to the Issue of Bonus Shares, The Companies Act, 2013 has introduced Section 63 to deal exclusively with Bonus Shares
Issue of bonus shares is covered under Section 63 of the Companies Act, 2013 read with rule 14 of The Companies (Share Capital and Debentures) Rules, 2014.
Source for issue of Bonus Shares:
As per Section- 63(1) a company may issue fully paid up bonus shares to its members out of following:
A. Free reserves.
B. Securities Premium Account.
C. Capital Redemption Reserve Account.
Source from which Bonus Shares can’t issue:
A. No issue of bonus shares shall be made capitalizing reserves created by the revaluation of assets. (Company can’t issue Bonus Shares out of reserve create from revaluation of assets).
B. The Company shall not issue shares in lieu of Dividend.
PROCEDURE FOR ISSUE OF BONUS SHARES
Call the Board Meeting:
- As per Section 173(3): Issue Notice of atleast 7 days for calling meeting of Board of Directors.
Hold the Board Meeting:
- Check the Quorum as per Section 174(1): Quorum for the Meeting of Board of Directors is 1/3rd of total strength of Board or 2 directors, whichever is higher.
- Place before the Board Resolution for issue of Bonus Shares.
- Pass Board Resolution for issue of shares.
- Decide the Ration of Shares offering to share holders.
- Fixing the date, time, and venue of the general meeting and authorizing a director or any other person to send the notice for the same to the members.
- Provisions of the Section 101 of the Companies Act 2013 provides for issue of notice of EGM in writing to below mentions atleast 21 days before the actual date of the EGM :
- All the Directors.
- Auditors of Company
- The notice shall specify the place, date, day and time of the meeting and contain a statement on the business to be transacted at the EGM.
- Authorize a director to do all the work relating to issue notice of right issue.
- File e-form- MGT-14 with in 30 days of Passing of Board Resolution for issue of shares.
- Resolution for issue of shares.
CONVENE A GENERAL MEETING:
- Check the Quorum.
- Check whether auditor is present, if not. Then Leave of absence is Granted or Not. (As per Section- 146).
- Pass Ordinary Resolution for bonus issue of shares.
Call the Board Meeting: As per Section 173(3): Issue Notice of atleast 7 days for calling meeting of Board of Directors.
Hold the Board Meeting
- Pass Board Resolution for allotment of shares.
Filling of e-Forms
1. File PAS-3:
- File e-form PAS-3 with in 30 days of passing of Board Resolution for allotment of shares.
- Ordinary Resolution for Bonus issue of shares.
- Board Resolution for allotment of shares.
- List of Allottees. (as per annexure –B of PAS-3)- Mentioning Name, Address, occupation if any and number of securities allotted to each of the allottees and the list shall be certified by the signatory of the form pas-3.
Issue Share Certificates:
- Company will issue share certificate to the share holders with in 2 month from the date of allotment of shares.
CHECKS FOR ISSUE OF BONUS SHARES
- Check whether Authorized capital is sufficient for issue of Bonus Shares.
- If Authorized capital is enough to issue bonus shares then it’s ok.
- If authorized capital is not enough then first alter the Capital of Company by alteration in MOA. (Procedure is given in my earlier article).
- Check Provision for Bonus issue in Article of Association of Company.
- If AOA authorize to issue Bonus Share then it’s ok.
- If AOA not authorize to issue Bonus Shares then alter the Article of Association.
- Check availability of resources for issue of Bonus shares.
- Check Quantum of Bonus shares.
- Check no default in payment of interest or principle in respect of fixed deposit or debt securities issued by it.
- Check no default in payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus.
- Check is there any partly paid up share on the date of allotment.
- If there is no Party paid up shares then it’s ok.
- If there are partly paid up share, then first make them fully paid up shares.
CONDITIONS FOR ISSUE OF BONUS SHARES
- Articles must contain provision for issue of bonus shares [As per Section-63(2) (a)].
- Bonus issue must be authorised by the members of the company (by passing of Ordinary Resolution) on recommendation of Board.
- Company should not have defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it and no defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus.
(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at email@example.com)