Introduction: Bonus shares, distributed free of cost to existing shareholders, are an alternative to dividend payouts. This article elucidates the procedure for issuing bonus shares in a private company under the Companies Act, 2013. It outlines the regulatory framework, conditions, and steps involved in this process.
General Meaning of Bonus issue of Shares: A bonus issue is the distribution of free shares by the company to the existing shareholders. A company may decide to distribute additional shares as an alternative to dividend payout. In a bonus issue, the number of shares increases, but the value of the investment remains the same.
It is an offer of free additional shares to the existing shareholders in proportion to their existing holdings.
When the company issue bonus shares to its shareholders, the term “record date” and “ex-date” are also mentioned. Let’s learn about the term “record date” and “ex-date” given below:
Record Date:
The record date is the cut-off date decided by the company to be eligible for bonus shares. All shareholders who have shares as on the record date will be eligible to receive bonus shares from the company.
Ex-Date:
The ex-date is one day before the record date. Here an investor has to buy the shares at least one day before the ex-date to become eligible for the bonus shares.
Example scenario For Bonus Issue:
Mr. XY holds 500 shares of a company at ₹10 each. If that company announces a 4:1 bonus, that is, for every one share, the shareholder will receive Four shares for free, Mr. XY will receive 2000 shares for the 500 shares held and the total holdings of Mr. XY will be 2500 shares. However, the investment value will remain the same.
REGULATORY FRAMEWORK FOR ISSUANCE OF BONUS SHARES:
In Case of Private Company:
1. Section 63 of Companies Act, 2013 and
2. Rule 14 of Companies (Share Capital and Debentures) Rules, 2014.
SOURCES FOR ISSUANCE OF BONUS SHARE:
Section 63 provides that a company may issue fully paid-up bonus shares to its members, out of-
1. Its free reserves;
2. The securities premium account; or
3. The capital redemption reserve account.
Note** No issue of bonus shares shall be made by capitalizing reserves created by the revaluation of assets.
TYPES OF BONUS ISSUE:
- Fully Paid Bonus Shares: When bonus shares are distributed free of cost in proportion of holding, it is called Fully Paid Bonus Shares.
These types of bonus shares can be issued from the following sources:
- Profit and loss account
- Capital reserves
- Capital redemption reserves
- Security premium account
- Partly Paid Bonus Shares: Before understanding party-paid up bonus shares, let’s understand what a partly-paid share is?
A partly paid share is a share in a company that is only partially paid compared to the full issue price.
The concept of partly-paid shares allows investors to purchase shares by paying only a portion of the total issue price upfront. The remaining amount for these shares can be settled through installments when the company issues calls. When a bonus is applied to these partly-paid shares, converting them into fully paid shares without requiring additional payments from shareholders via profit capitalization, they are termed as partly-paid up bonus shares.
However, it’s important to note that unlike fully-paid up bonus shares, which can be issued through a capital redemption reserve account or security account, partly paid-up bonus shares do not have this option available.
CONDITIONS FOR ISSUE OF BONUS SHARE:
The following conditions must be satisfied before issuing bonus shares:
1. Issue of Bonus Shares is authorized by its articles;
2. Bonus Shares are being issued on the recommendation of the Board and been authorized in the general meeting of the company by members;
3. The Company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;
4. The company has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus;
5. The partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up;
6. It complies with such conditions as may be prescribed.
PROCEDURE FOR ISSUE OF BONUS SHARES UNDER COMPANIES ACT 2013:
1. Issuing Notice of Board meeting (at least 7 days before the meeting of the Board) as per section 173(3) of Companies Act, 2013.
2. Holding the Board Meeting for the purpose of:
– For Recommending Issue of Bonus shares.
– For deciding the ratio of shares offering to the shareholders.
– For approving the Notice of General Meeting and Fixing the Date of General Meeting for seeking the consent of the members
– Pass Board Resolution (Subject to approval of Members) for Issue of Bonus Shares and Alteration in MOA/AOA, if so required.
3. Issue the Notice of EGM to all the Directors, Members and Auditors of the Company, along with the Explanatory statement, (at least 21 clear days) before the EGM meeting, for considering the special business of issue of bonus shares.
4. Hold the Extra-Ordinary General Meeting and Pass Ordinary-Resolution for issue of bonus shares.
5. File Form MGT-14 with the Registrar within 30 days of passing of the Ordinary-Resolution. The following documents shall be attached with Form MGT-14:
– Notice with Explanatory Statements;
– Certified True Copy of All Resolution Passed at Extra-Ordinary General Meeting,
6. Issuing the notice of Board meeting (at least 7 days before the Board meeting) as per provision of section 173(3) of Companies Act, 2013 for passing resolution for Allotment of Bonus Shares.
7. File Form PAS-3 (Return of Allotment) within 30 days of allotment. The following documents shall be attached with form PAS-3:
– Ordinary Resolution passed by the members in EGM, for Bonus issue of shares.
– Board Resolution passed by the Board of Directors, for allotment of shares
– List of Allottees mentioning Name, Address, Pan Card Number, Number of Shares Allotted.
8. Issue of Share Certificates
The Company shall issue share certificate to the shareholders within 2 months from the date of allotment of shares.
9. Making Entries in Register of Members.
Format of Ordinary resolution for issue of Bonus Shares
CERTIFIED TRUE COPY OF THE ORDINARY RESOLUTION PASSED AT THE EXTRA ORDINARY GENERAL MEETING OF THE MEMBERS OF ABC PRIVATE LIMITED HELD ON DAY, 25TH DAY OF MONTH 2024 AT 11:00 A.M. AT ITS REGISTERED OFFICE AT…………….
“RESOLVED THAT in accordance with provisions of Section 63 of Companies Act, 2013, read with Rule 14 of Companies (Share Capital and Debentures) Rules, 2014 (including any statutory modifications or reenactments thereof for the time being in force), the relevant provisions of the Memorandum and Articles of Association of the Company and the recommendation of the Board of Directors of the company subject to such approvals, consents, permissions and sanctions, as may be necessary from appropriate authorities, consent of Members, be and is hereby accorded to the Board of Directors of the Company (“the Board”) for capitalization of sum to the extent of Rs. Amount……………../- (Amount in words) standing to the credit of Free Reserves of the Company, as may be considered necessary by the Board, for the purpose of issue of Bonus Shares of Rs.10/- (Rupees Ten) each, credited as fully paid-up Equity Shares to the holders of the Equity Shares of the Company, whose names shall appear in the Register of Members to be determined by the Board or person authorized by board, for the purpose, in the proportion of their existing fully paid-up Equity Share of Rs.10/- (Rupees Ten) each held by them and that the Bonus Shares so distributed shall, for all purposes, be treated as an increase in the nominal amount in the Capital of the Company held by each such member, and not as income;
RESOLVED FURTHER THAT the Bonus Shares so allotted shall rank pari passu in all respects including dividend with the existing equity shares of the Company.
RESOLVED FURTHER THAT the Bonus Shares so allotted shall always be subject to the terms and conditions contained in the Memorandum and Articles of Association of the Company.
RESOLVED FURTHER THAT Board of Directors of the Company be and are hereby authorized to do or cause to do all such acts, deeds, matters as may be necessary in the interest of the Company to give effect to this resolution”
Conclusion: Issuing bonus shares in a private company requires adherence to the regulatory provisions outlined in the Companies Act, 2013. By following the prescribed procedure, including board resolutions, shareholder approvals, and regulatory filings, companies can successfully issue bonus shares to their shareholders. This not only enhances shareholder value but also strengthens the company’s capital base.
Also Read: Procedure For Further Issue of Shares on the Basis of Right Under Companies Act 2013
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