Issue of bonus shares

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

26 October 2012 hi

A COMPANY HAS RS. 57 LACS AS SHARE APPICATION MONEY PENDING ALLOTMENT IN ITS LIABILITIES SIDE OF BALANCE SHEET. CAN THE CO. ISSUE BONUS SHARES FROM SUCH AMOUNT?
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Ajay Mishra

Ajay Mishra (Expert)
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26 October 2012 Hi

Share application money pending allotment can not be use for issue of bonus shares.

• 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.
A company cannot issue bonus, unless it is authorized by its articles, therefore, the articles of a company must contain provisions for authorization for issue of bonus shares. In absence of such authorization, articles will have to be altered by applying the provisions of section 31 of the Companies Act.
The paid up share capita after bonus issue must be within the autorised share capital of the company otherwise authorized share capital of the company shall have to be increased at first place and then the company can go in for a bonus issue.

Regulation 92 to 95 of Chapter IX of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 deal with bonus issue of listed company. The listed company must comply such regulation before issue of bonus shares to the shareholders.

If the Company has adopted regulation 96 of Table A in Schedule I of 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 auditor and company secretary of the company in drawing up the terms and conditions of the bonus issue.

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