Introduction of Bonus Shares

Bonus issue means offer of free additional shares to the existing shareholders. A company may decide to distribute further shares as an alternative to increase dividend payout.

Bonus shares may be issued by company to restructure the company’s reserves. Issue of bonus shares will increase the company’s cash flow but the net asset of the company will remain same.

Example: Company issues Bonus shares in the ratio of 4:1 (1Bonus share for every 4 shares held by them)

If Mr. X existing shareholder holds 400 shares of the company, he will get 100 bonus shares, now his holding will be 500 shares in the company. At the time of issuing dividend, he will get dividend on 500 shares not on 400 shares

[400*1/4 = 100 Bonus shares

Holding after Bonus Issue will be : 400 Shares + 100 Shares]

Whether there is issue of dividend or issue of bonus shares purpose will be providing income to the shareholders. While at the time of dividend issue, shareholders may get money in cash and at the time of issuing bonus shares, shareholder will get benefit through shares they can sell their shares and get liquidity on the same.

Related Provisions for issue Bonus Shares:

1. Section 63 of the Companies Act, 2013

2. Rule 14 of The Companies (Share Capital and Debentures) Rules,2014

Major Points for issue of Bonus Shares:

1. The Company must have article in Articles of Association to issue bonus shares; if not than company have to alter the Articles of Association as per the provision of the act [section 63(2)(a) and alteration to be done as per Section 14 of the Companies Act, 2013]

2. The company must have sufficient authorised capital to issue bonus shares; if not than company has to increase the authorised share capital as per the provision of the act [Section 13 & Section 61(1)(a) of the Companies Act, 2013]

3. The Company has not defaulted in

  • Payment of interest of principal of fixed deposit or debt securities
  • Payment of statutory dues of the employees such as, contribution to PF, gratuity and bonus.

[Section 63(2)(c)(d) of the Companies Act, 2013]

4. If company have the partly paid-up shares outstanding on the date of allotment, are made fully paid-up; [Section 63(2)(e) of the Companies Act, 2013]

5. Bonus shares must have to be fully paid up It can be issued out of;

i. Its Free Reserves

ii. The Securities Premium Account; or

iii. The Capital Redemption Reserve Account

Note: Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets.[section 63(1) of the Companies Act, 2013]

6. Bonus issue will increase in number of shares of the Company but it can reduce the share price. This can be beneficial to the investors to purchase the shares in the company.

7. Bonus shares is symbol that the company is in better position to serve their shareholders, which shows good financial position of the Company.

8. Once the board recommending a bonus issue, shall not subsequently withdraw the same.

Sources of Funds must be used for Bonus Shares:

A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, anyone out of the following—

(i) its free reserves;

(ii) the securities premium account; or

(iii) the capital redemption reserve account:

Note: No issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets [Section 63(1) of the Companies Act, 2013]

Process of Bonus Issue

1. Circulate Notice & Agenda for conducting the Board meeting at least 7 days prior to the Meeting. [Section 173(3) of the Companies Act, 2013]

Note: Meeting of the Board may be called at shorter notice to transact urgent business subject to condition prescribed under the provision [proviso to section 173(3)]

2. Hold Board Meeting:

To consider and recommend issue of Bonus Shares to the existing shareholders.

To decide ratio and quantum of issuing bonus shares.

To fix day, date, time and venue for Extraordinary General Meeting of the shareholders of the company and to approve the notice convening said meeting.

3. File Form MGT-14 within 30 days of passing of Board Resolution except in case of private company. [section 179(3)(c) of Companies Act 2013]

4. Send the notice of General Meeting to the Members of the company not less than clear twenty-one days notice either in writing or through electronic mode in such manner prescribed under the act. [section 101 of the Companies Act, 2013]

5. Convene General Meeting of the company for following purpose:

To take Approval for bonus issue (Ordinary Resolution)

6. Conduct Board Meeting for passing of resolution for allotment of shares and issuing share certificates.

7. File return of allotment in Form PAS-3 within 15 days from the date of passing Board Resolution for Allotment.

8. Update Register of members for issuing shares.

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  1. Surya Chhabria says:

    Sir, can the source of issuing the bonus shares be out of current year profit or it has to be out of accumulated profits and general reserve only or it can be out of last audited financials only.?

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May 2021