Issue of Bonus Shares

BONUS SHARES:

Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns.

Bonus share is a boom-keeping transaction, 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.

Issue of Bonus Shares:

Issue of Bonus Shares is governed by Section 63 of the Companies Act, 2013.

Section 63(1)

A Company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of –

1. Its free reserves;
2. The securities premium account; or
3. The capital redemption reserve account:

Provided that no issue of Bonus Shares shall be made by capitalizing reserves created by the revaluation of assets.

[Explanation: This sub-section enables a company to issue bonus shares to its existing members, in any manner whatsoever, out of its free reserves, the securities premium account and the capital redemption reserve account.

As per this sub-section Company shall not issue Bonus Shares by capitalizing reserves created out of revaluation of assets]

Case Law:

Bhagwati Developers Vs Peraless General Finance & Investment Co.

In the above mentioned case it was held that Company can issue Bonus Shares by capitalization of Revaluation reserves, if the articles so permit. In order to overcome Bhagwati’s decision, Section 63 provides that no issue of Bonus Shares shall be made by capitalizing reserves created by revaluation of assets.

Section 63(2):

No company shall capitalize its profits or reserves for the purpose of issuing fully paid up bonus shares under sub section (1), unless:-

a. It is authorized by its articles;

b. It has, on the recommendation of the Board, been authorized in the general meeting of the Company;

c. It has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;

d. It has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity and bonus;

e. The partly paid-up shares, if any outstanding on the date of allotment, are made fully paid up;

f. It complies with such conditions as may be prescribed.

[Explanation : Under this sub-section, basically the conditions for issue of bonus shares to the existing members of the Company are given]

Section 63(3):

The bonus shares shall not be issued in lieu of dividend

[Explanation: This sub section says that if a company wants to distribute the dividend then it cant do so by issuing the Bonus Shares]

Procedure for Issue of Bonus 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.

• 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.

(CS AYUSH SUHIRID)
Email Id: csayush1214@gmail.com