Issue of Bonus Shares under Companies Act, 2013
The issue of bonus shares is an important concept in company law, particularly in relation to corporate finance and shareholder rights. It reflects a company’s decision to capitalise its accumulated profits and distribute them among existing shareholders in the form of additional shares. This mechanism enables companies to reward shareholders without involving any cash outflow.
The legal framework governing the issue of bonus shares in India is primarily laid down under Section 63 of the Companies Act, 2013, read with the relevant rules. The provision ensures that such issuance is carried out in a regulated and transparent manner while safeguarding the interests of stakeholders.
Bonus shares refer to the shares issued by a company to its existing shareholders without any additional consideration. These shares are allotted in proportion to the number of shares already held by the shareholders. The issue of bonus shares involves the conversion of a company’s reserves into share capital.
Unlike cash dividends, bonus shares do not involve any payment to shareholders. Instead, they represent a capitalisation of profits. In accounting terms, it is merely a transfer from reserves to share capital. Therefore, the overall financial position of the company remains unchanged, although the composition of its capital structure is altered.
The issue of bonus shares is often undertaken when a company has substantial accumulated profits but prefers to retain cash for operational or expansion purposes. It is also used as a means to enhance shareholder confidence and market perception.
Legal Framework under Section 63
Section 63 of the Companies Act, 2013 governs the issue of bonus shares. The provision came into effect on 1st April 2014 and lays down the conditions, sources, and restrictions for such issuance.
A company may issue fully paid-up bonus shares out of the following sources:
- Free reserves: These are the reserves available for distribution as dividend and represent accumulated profits of the company.
- Securities premium account: This arises when shares are issued at a premium and can be utilised for specific purposes, including bonus issues.
- Capital redemption reserve account: This reserve is created when redeemable preference shares are redeemed and may be used for issuing bonus shares.
These sources ensure that only genuine and realised profits are utilised for capitalisation.
Prohibition on Certain Sources
The law clearly prohibits the use of reserves created by the revaluation of assets for issuing bonus shares. Revaluation reserves represent notional gains and not actual realised profits. Therefore, their utilisation for bonus issues is not permitted.
Section 63 prescribes several mandatory conditions that must be fulfilled before a company can issue bonus shares. These conditions ensure financial discipline and protect the interests of creditors and employees.
Authorisation by Articles of Association
The company must be authorised by its Articles of Association to issue bonus shares. In case such authority is not present, the Articles must be amended in accordance with the law.
The issue of bonus shares must be recommended by the Board of Directors and subsequently approved by the shareholders in a general meeting. This reflects the principle of corporate democracy and ensures that shareholders have a say in capital restructuring.
No Default in Financial Obligations
The company must not have defaulted in:
- Payment of interest or principal on fixed deposits
- Repayment of debt securities
This condition ensures that companies with financial instability do not undertake bonus issues.
No Default in Employee Dues
The company must also ensure that there is no default in the payment of statutory dues to employees, including:
- Provident fund contributions
- Gratuity
- Bonus
This requirement safeguards employee welfare and ensures compliance with labour laws.
If there are any partly paid-up shares outstanding, they must be made fully paid-up before the issue of bonus shares. Bonus shares can only be issued as fully paid-up shares.
Compliance with Prescribed Rules
The company must comply with all applicable rules and regulatory requirements as prescribed under the Companies Act and related rules.
Section 63 expressly provides that bonus shares cannot be issued in lieu of dividend. This means that companies cannot substitute the obligation of declaring dividends by issuing bonus shares. The two serve different purposes—dividends provide immediate income, while bonus shares increase capital holding.
Before initiating the process of issuing bonus shares, certain practical and legal prerequisites must be satisfied:
- The Articles of Association must permit the issue.
- The authorised share capital must be sufficient. If not, the Memorandum of Association must be altered to increase it.
- Adequate reserves must be available for capitalisation.
- There must be no defaults in financial or statutory obligations.
- All shares must be fully paid-up.
These prerequisites ensure that the company is legally and financially capable of undertaking the bonus issue.
The issue of bonus shares involves a structured corporate process. Each step must be carefully followed to ensure compliance with legal requirements.
Board Meeting
The process begins with the convening of a Board Meeting. A notice of at least seven days must be given as per the statutory requirements.
During the meeting:
- The proposal for issuing bonus shares is considered.
- The ratio of the bonus issue is determined.
- A Board resolution is passed recommending the issue.
- The date, time, and venue for the general meeting are fixed.
- Authority is given to send notices to shareholders.
The quorum for the meeting must be at least one-third of the total strength of the Board.
Circulation of Minutes and Filing
After the Board Meeting:
- Draft minutes are circulated among directors for their comments.
- In the case of public companies, the resolution is filed with the Registrar of Companies in Form MGT-14 within thirty days.
Notice of General Meeting
A notice of the general meeting must be sent to all entitled persons, including directors, shareholders, and auditors. The notice period must be at least twenty-one clear days.
General Meeting
An Extraordinary General Meeting is convened, where the shareholders consider the proposal for bonus shares. The issue is authorised through an ordinary resolution passed by a simple majority.
Final Board Meeting for Allotment
After obtaining shareholder approval, another Board Meeting is held to approve the allotment of bonus shares. The Board ensures that all procedural requirements are fulfilled.
Filing of Return of Allotment
The company is required to file a return of allotment in Form PAS-3 within thirty days of the allotment. The filing must include:
- Copy of the ordinary resolution
- Copy of the Board resolution
- List of allottees with relevant details
- Any other necessary documents
In case of shares held in dematerialised form, the company must inform the depository immediately. For physical shares, share certificates must be issued within two months from the date of allotment.
The issue of bonus shares provides several benefits to both the company and its shareholders.
Advantages to the Company
- Conservation of Cash: Since no cash outflow is involved, the company can retain its liquidity for business operations and expansion.
- Improved Market Perception: Bonus issues often signal financial strength and profitability, enhancing investor confidence.
- Better Capital Structure: It helps align the share capital with the company’s assets.
- Increased Liquidity of Shares: With more shares in circulation, the market price may become more affordable, improving trading activity.
- Increase in Shareholding: Shareholders receive additional shares without any cost.
- Enhanced Future Returns: With an increased number of shares, the potential for higher dividend income in the future rises.
- Indication of Growth: Bonus issues reflect the company’s long-term growth prospects and stability.
Illustration of Bonus Issue
Consider a company with the following financial position:
- Issued capital: Rs. 50,00,000
- Reserves: Rs. 30,00,000
- Number of shares: 1,00,000
- Price per share: Rs. 50
If the company announces a bonus issue in the ratio of 1:5, shareholders receive one additional share for every five shares held.
After the bonus issue:
- Total shares increase to 1,20,000
- Share capital increases to Rs. 60,00,000
- Reserves reduce to Rs. 20,00,000
The total value of the company remains unchanged at Rs. 80,00,000. However, the number of shares increases, resulting in a proportionate adjustment in value per share.
Bonus shares and dividends are both methods of distributing profits, but they differ significantly in nature:
- Dividend: Involves cash payment to shareholders and reduces the company’s cash reserves.
- Bonus Shares: Involves capitalisation of reserves without any cash outflow.
While dividends provide immediate income, bonus shares increase the capital base and long-term investment value.
Conclusion
The issue of bonus shares is a well-regulated corporate action that reflects a company’s financial health and long-term strategy. Governed by Section 63 of the Companies Act, 2013, it ensures that only genuine profits are capitalised and distributed among shareholders.
The process involves strict compliance with statutory conditions and procedural requirements, ensuring transparency and accountability. While bonus shares do not provide immediate monetary benefits, they enhance shareholder value and strengthen the company’s capital structure.
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