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A public limited company gets its equity capital from the investment made by the shareholders. Hence the shareholders expect a return on their investment. The company can do the same either by declaring cash dividends or bonus shares. Bonus shares are accumulated profits that a company distributes to the current shareholders as free shares. There are no additional costs involved, and the shares are given the basis of the current holding of shareholders.
Cash dividends are actual transactions, and there is a payout involved. However, in the case of bonus shares, there is no payout, and it is just a book entry where Reserves are capitalized.

1. Prerequisites For Issue of Bonus Shares

Prior to the issue of bonus shares, there are some conditions that must be ascertained. They are as follows:

  • Ensure that the Articles of Association authorizes it, if not then the Articles of Association needs to be altered in accordance with Section 14 of the Act.

  • Verify that the authorized capital is sufficient for the issue of Bonus shares. If it is not, then the Memorandum of Association has to be altered to increase the authorized capital.

  • The issue must be authorized at the General Meeting by shareholders.

  • Ensure there are no defaults in payment of interest or principal of the fixed deposit or debt security issued by the company.

  • The company must also ensure that there are no defaults in payment of statutory dues to the employees like gratuity, bonus, or contribution to the provident fund.

  • Ensure that all the shares are fully paid, if not then they must be fully paid

  • The company must check the availability of all its resources.

2. Procedure For Issue Of Bonus Shares

The following are the steps to be adhered by the company for the issue of Bonus shares.

  1. Call a Board Meeting: The first step to be taken is to call for a Board Meeting. As per Section 173(3) of the Act, the issue of the notice must be at least 7 days before the Board Meeting.

  2. Convene a Board Meeting: The company must then hold the Board Meeting and place the agenda. To convene the meeting, the following must be ensured:
    – Ensure the meeting has the required quorum that is ⅓ rd of the total strength of the Board. – Place the board resolution for approving the issue subject to the approval by shareholders in a general meeting by an ordinary resolution. – Ensure that the resolution is passed. – The ratio of the bonus shares must be fixed. – Decide the date, time and venue for the general meeting and authorize a director to send notices for the same.

  3. Circulate draft minutes: The draft minutes must be circulated within the stipulated time to all directors for their comments. For a public company, the board resolution in the form MGT – 14 must be filed in less than 30 days with the Registrar of Companies.

  4. Send Notice of General Meeting: The notice for the General Meeting for approving the issue of bonus shares must be sent out to all directors, shareholders, auditors and all members entitled to receive, giving no less than 21 clear days for the same.

  5. Convene the General Meeting: The Extraordinary General Meeting must be convened, and the issue of bonus shares must be authorized by passing Ordinary resolution by simple majority as per section 114(1) of the Act and authorize the Board to allow the bonus shares.

  6. Convene a Board Meeting: The company must convene a Board Meeting approving the allotment of the bonus shares and follow all the protocols for the same.

  7. File Form No. PAS -3: The company must then file the return of allotment in the Form PAS – 3 within 30 days of allotment of securities of the company having a share capital. The attachments required will be as mentioned here below:
    – Copy of the Ordinary Resolution passed in the Extraordinary General Meeting. – Copy of Board resolution approving allotment of shares. – List of allottees mentioning the name, address, occupation if any, and a number of securities allocated to each of the allottees and the list will be certified by the signatory of the Form PAS-3. – Any other documents as may be applicable.

  8. Issue of share certificates: The company must inform the depository immediately on allotment when the shares are held in Demat form, if they are held in physical form then the share certificates must be issued within 2 months from the date of allotment.

3. Advantages of Bonus Shares

For a company:
– It can help the company to conserve cash by issuing shares in lieu of dividend. – It brings about a balance in the pricing of the share. Since the issue is only a book entry, the total shareholding is constant; however, the number of shares has increased. – It brings the share capital in line with the assets employed. – It helps in the capitalization of reserves. For a shareholder:
– It increases the investments of the shareholder, and it is tax-free. – It assures the company’s policy for long term growth. – It increases the cash dividend receivable in the future, as the number of shares held by the shareholder has increased.

4. Illustration

Let us take an example, XYZ company announces a bonus issue, 1 share for every 5 shares held. The issued capital of the company – Rs.50,00,000 Reserves stand at – Rs.30,00,000 The total number of issued shares is 1,00,000 Price per share Rs.50 Now when bonus shares are issued the position will be as follows: Total share – 1,00,000 (original) 20,000 (Bonus) – 1,20,000 Price per bonus share – Rs. 50 Total cost of bonus shares – 10,00,000 So, Reserves – 20,00,000 (30 lakh – 10,00,000) Issued Capital – 60,00,000 (50,00,000+10,00,000) Therefore the total shareholding stands at Rs.80,00,000 even post issue of bonus shares. However, the number of shares increase to 1,20,000. The Companies Act 2013 (“Act”) has introduced Section 63 to deal with the issue of bonus shares. The said section read along with rule 14 of the Companies (Share Capital and Debenture Rules) 2014 states the following : Bonus shares can be issued by the following sources as per Section 63(1) of the Companies Act 2013:
– Free Reserves – Securities Premium – Capital Redemption Reserve Account
However, the following cannot be used for the issue:
– Revaluation reserves cannot be capitalized – Shares cannot be issued in lieu of dividend Issue of Bonus Shares is a decision taken by a company when it is performing well and would like to share profits with the shareholders, but cannot issue cash dividends due to cash restrictions. Generally, new companies would like to issue a bonus, and mature companies would prefer to give cash dividends. Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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