• SOURCES FOR BONUS ISSUE Section 78(2) of the Companies Act says that the Securities Premium 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 provides that 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. As per section 205(3) of the Companies Act, 1956, profits or reserves of a company may be capitalized by issuing fully paid bonus shares or paying up an amount for the time being unpaid on any shares held by the members of the company.
The Supreme Court held in case of Bhagwati Developers v Peerless General Finance & Investment Co. Ltd. and Others (2005) 62 SCL 574 (SC) decided on August 9, 2005 that proviso of section 205 (3) permits capitalization of profit or reserves of a company for the purpose of issuance of fully paid up shares. However, the shares issued by way of capitalization of revaluation reserves will not be considered for promoter contribution under the SEBI Guidelines. The Supreme Court in the case of CIT Vs. General Insurance Corp. (2008) has held that expenditure on bonus share is not a capital expenditure as there is no increase in the capital base of the company because existing free reserves of the company are utilized for issue of bonus shares.
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