As per section 205(3) of the Companies Act, 1956 there is no prohibition on a company to capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares or paying up any amount, for the time being unpaid, on any shares held by the members of the company. However the following points have to be borne in mind while determining the profits or reserves which may be capitalized, namely,
1. The securities premium account may be applied by the company in paying up unissued securities of the company to be issued to members of the company as fully paid bonus securities [Section 78(2) of the Companies Act, 1956]
2. The capital redemption reserve account may, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares. [Section 80(5) of the Companies Act, 1956]
3. If the company has adopted regulation 96 of Table A in Schedule I to the Companies Act, 1956 only the share premium account and capital redemption reserve account shall be applied in the paying up of unissued shares to be issued to members of the company as fully paid bonus shares. It is advisable to consult the auditors of the company in drawing up the terms and conditions of the bonus issue
Bonus shares can be issued only out of Reserves of the company.
The Bonus issue is made out of free reserves built out of genuine profits or share premium collected in cash only.
Money in Share Premium Account can not be treated as free reserve as they are in the nature of Capital Reserves. Circular No. 3/77 dated 15-04-1977)
Reserve created by revaluation of fixed assets are not capitalized.
As per the explanation of Companies (Declaration of Dividend out of reserve) Rules, 1975 revaluation reserve is specifically excluded for the purpose of dividend.
Explanation.—For the purposes of this rule, "profits earned by a company in previous years and transferred by it to the reserves" shall mean the total amount of net profits after tax, transferred to reserves as at the beginning of the year for which the dividend is to be declared; and in computing the said amount, the appropriations out of the amount transferred from the Development Rebate Reserve at the expiry of the period specified under the Income-tax Act, 1961 (43 of 1961) shall be included and all items of capital reserves including reserves created by revaluation of assets shall be excluded.
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