06 April 2017
Company can issue bonus shares only out of free reserve . Capital reserve is not a free reserve. It is made out of capital profits earned due to the sale of fixed assets at a price greater than its cost or profit on the reissue of forfeited shares. Hence, it is not freely available to be distributed among shareholders
Just to clarify more, As Capital profit are generally from Sale of assets, So it will not be appropriate for company to sell its assets and distribute those profits to shareholders as dividend or Bonus. Because the Expectation from company is to earn profits from its business and then distribute that profits among the shareholders. That's why capital profit are not allowed as free reserves.
I hope it will be clear. Please let me know if you have any further queries.
CAclubindia
