Blog Details

Bonus Shares

ISSUE OF BONUS SHARES

Section 63 of Companies Act, 2013, read with Rule 14 (Companies Share Capital and Debenture) Rules, 2014 deals with bonus shares. Bonus Shares are given to shareholders as some additional shares based upon the number of shares the shareholders hold in the Company. Bonus shares are accumulated profits that a company distributes to the current shareholders as free shares. 

Bonus Shares increase the profitableness of the Company. Bonus shares are issued by a company when it is not able to pay a dividend to its shareholders due to shortage of funds.

Sources of issue of bonus shares:

As per Section 63(1) a company may issue fully paid-up bonus shares to its members out of the following:

• Free reserves.
• Securities Premium Account.
• Capital Redemption Reserve Account.

However, the following cannot be used for the issue:

• Revaluation reserves cannot be capitalized
• Shares cannot be issued in lieu of dividend.

Advantages of bonus shares:

To investors:

• investors do not have to pay tax for receiving bonus shares.
• bonus shares are considered beneficial for long-term shareholders of the company looking to multiply their investment.
• bonus shares are free of cost to shareholders
• it increases the cash dividend receivable in the future as the number of shares held by the shareholder has increased.

To companies:

• the issue of bonus shares enhances the company's value and increases its image in the market, gaining the trust of existing shareholders and attracting small investors to be a part of the stock market.
• the companies have more free-floating shares with the issue of bonus shares in the market.
• it benefits companies where they are not able to pay cash dividends to their shareholders.

Disadvantages of bonus shares:

• The company do not receive any cash while issuing bonus shares.
• When a company keep on issuing bonus shares the cost of the bonus issue keeps adding up over the years.

Prerequisites For Issue of Bonus Shares

Prior to the issue of bonus shares, there are some conditions that must be ascertained. They are as follows:

• Ensure that the AOA authorizes the issue of bonus shares, if not then the AOA should be altered first.
• The authorized capital must be sufficient for the issue of Bonus shares. If not, then the MOA has to be altered to increase the authorized capital.
• The issue must be authorized at the General Meeting by shareholders.
• There should be no defaults in payment of interest or principal of the fixed deposit or debt security issued by the company.
• The company must also ensure that there are no defaults in payment of statutory dues to the employees.
• All the shares should be fully paid
• The company must check the availability of all its resources.

Procedure For Issue Of Bonus Shares

The following are the steps to be taken by the company for the issue of Bonus shares:

1. The first step to be taken is to call for a board meeting. The notice must be issued at least 7 days before the board meeting.
2. The company must then hold the board meeting and place the agenda. To convene the meeting, the following must be ensured:
   • The meeting has the required quorum
   • Place the board resolution for approving the issue subject to the approval by shareholders in a general meeting by an ordinary resolution.
   • Ensure that the resolution is passed.
   • The ratio of the bonus shares must be fixed.
   • Decide the date, time and venue for the general meeting and authorize a director to send notices for the same.
3. The draft minutes must be circulated to all directors for their comments. For a public company, the board resolution in the form mgt-14 must be filed in less than 30 days with roc.
4. The notice for the general meeting must be sent to all directors, shareholders, auditors and all members entitled to receive, atleast 21 days before the meeting.
5. The general meeting must be convened, and the issue of bonus shares must be authorized by passing ordinary resolution.
6. The company must convene a board meeting approving the allotment of the bonus shares.
7. The company must then file the return of allotment in form pas – 3 within 30 days of allotment of securities. Following shall be attached with the form:

• Copy of the ordinary resolution passed in the general meeting.
• Copy of board resolution approving allotment of shares.
• List of allottees.
• Any other documents as may be applicable.

1. The company must inform the depository immediately on allotment where the shares are held in demat form, and if they are held in physical form then the share certificates must be issued within 2 months from the date of allotment.

FAQs:

1. Does the issue of bonus shares enhances the company’s value?

Yes. The issue of bonus shares enhances the company's value and increases positions and image in the market, gaining the trust of existing shareholders and attracting several small investors to be a part of the stock market.

1. What happens if bonus shares are issued?

When the bonus shares are issued, the number of shares the shareholder holds will increase, but an investment's overall value will remain the same.

1. Can a private company issue bonus shares?

Yes

1. Is dividend paid on bonus shares?

Yes Calculation of dividend depends on the total number of shares you have on your DEMAT account. when company announces dividend, it doesn’t check whether the shares in the account are rights issues or bonus shares.

1. What is the minimum time duration between two bonus issue?

only two bonuses can be issued in a period of 5 years.

1. Is there any limit on issue of bonus shares?

It shall issue bonus shares to the existing shareholders in proportion to their existing holdings.

1. Can bonus shares be issued at premium?

Bonus shares are generally issued at times when the company is in the state of prosperous with huge accumulated surplus. As per section 52 of the Act, securities premium account can be used for the issue of fully paid-up bonus shares.

1. How does bonus issue affect balance sheet?

The balance sheet is not particularly affected because of bonus shares.

1. Can a shareholder refuse to accept bonus shares?

Once a resolution for the bonus issue has been approved by the general body of shareholders, a shareholder cannot refuse to accept the bonus shares

1. Is a special resolution required for the bonus issue?

As per the provisions of Sections, 63 of the Companies Act, 2013, approval of the shareholders is required to be accorded for the issuance of Bonus Shares to the members of the Company by way of passing a Special Resolution.

1. How bonus issue affect the share price?

By issuing bonus shares, the total number of shares of the company increases, thus reducing its stock price and making it accessible to more investors.