Bonus Shares- Benefits, Conditions and Procedure

Bonus Shares- Benefits, Conditions and Procedure

Something extra at no cost- Wow!!! It’s a bonus (gift). Everybody wants free gifts and so do the shareholders of a company, who are its real owners. A bonus share is a gift given by a company to the existing shareholders in proportion to their respective shareholding. Bonus shares are issued in proportion to the existing shares held.

E.g. If a company declares bonus shares of 2:1. In such a case, a shareholder holding 100  shares on record date will get 200 shares with no additional cost. If existing shares are bought at INR 30 per share, then the total shareholding of the shareholder shall become 300 shares after allotment of bonus shares with no additional cost. Accordingly, cost per share shall reduce from INR 30 to INR 10 (3000/300) 

Let us understand the benefits, conditions and procedure for the issuance of bonus shares in this article.

1.   Benefits of bonus shares

a. To company

Business runners issue bonus shares with an objective to increase the confidence of shareholders in the company. In return, they get following advantages:

  • Free reserves are utilized in an optimum manner.
  • Liquidity of the company is maintained as there is no cash pay-out involved in bonus shares.
  • It gives a perception of strong going concern as business is committed for long term growth prospects.
  • Pricing of shares initially gets reduced upon issue of bonus shares but once the more shares are floated in market, more buyers are there to purchase and ultimately, increase in price of shares is there.

b. To shareholders

  • Bonus shares increase the investments of a shareholder automatically without paying any cost. Therefore, Cost per unit of shares decreases and it results in higher profits.
  • Chances of receiving a higher dividend in future increases due to increased shareholding.
  • Bonus shares do not attract any taxes for shareholders.

2.   Conditions to be satisfied for issuance of bonus shares

A company has to satisfy following conditions before issuing bonus shares using its profits or reserves:

  • Articles of association must authorize the issue of bonus shares and capitalization of profit. Else, there should be suitable amendments in the articles via resolution.
  • There should not be any default in payment of interest or principal of fixed deposits or debt securities issued by the company.
  • The Company must have not defaulted in payment of statutory dues of the employees such as  contribution to provident fund, gratuity and bonus;
  • No share can be partly paid on the date of issuance of bonus shares. Else, partly paid shares have to be made fully paid before issuance of bonus shares.
  • The bonus shares should not be issued as a replacement of dividends.
  • The bonus issue should be authorized by the shareholders in a general meeting.
  • Once the bonus issue of shares is announced by the Board, it should not be withdrawn subsequently as it is prohibited under rule 14 of (Companies Share Capital and Debentures), Rules, 2014.
  • Restrictions imposed by SEBI:
    • As per guidelines issued by SEBI, No company shall, pending conversion of Fully Convertible Debentures (FCDs) or Partly Convertible Debentures (PCDs), issue bonus shares unless similar benefit is extended to the holders of such FCDs or PCDs, through reservation of shares in proportion to such convertible part of FCDs/PCDs.
    • No company shall issue any bonus shares during the period commencing from the submission of offer document to the Board on behalf of the company for public, till the securities referred to in the said offer document have been listed or application moneys refunded on account of non-listing or under subscription, etc.
  • There should be sufficient authorised share capital margin available to accommodate issue of bonus shares. Therefore, a company should increase its authorised share capital if required.
  • While issuing bonus shares to existing non-resident shareholders, it must be ensured that original shares acquired or held were in accordance with FEMA regulations.

3. Which funds can be used for the issuance of Bonus Shares

As per Section 63(1) of Companies Act, 2013, fully paid bonus shares can be issued out of:

  1. free reserves or 
  2. securities premium Account or 
  3. capital redemption reserve.

As per proviso to Section 63(1), no bonus shares can be issued out of capitalising reserves created by the revaluation of assets. However, unlisted public or private companies can utilise revaluation reserves for bonus issues as pronounced by the Supreme Court in the case law of  Bhagwati Developers v. Peerless General Finance & Investment Company (2005) 62 SCL 574 (SC).

4.   Procedure for issue of bonus shares

A company planning to issue bonus shares must follow below steps:

  • Check articles of association to substantiate the issue of bonus shares within its boundaries. In other cases, articles have to be amended with shareholders’ approval.
  • Check the current authorized share capital and pass necessary resolutions to approve an increase in authorised share capital if required.
  • Ensure that all shares are fully paid up.
  • Confirm that the company has neither made defaults in repaying interest or principal on deposits or debt securities or statutory dues.
  • Make sure that sources to be utilized are only out of free reserves or securities premium or capital redemption reserve or revaluation reserve (in case of listed company only).
  • Find out any pending FCD or PCD holders and reserve a portion of shares for them to be allotted at the time of conversion.
  • Intimate stock exchanges by giving notice in advance of at least 7 days about the record date for issue of shares. (For listed companies).
  • Give a notice of 7 days to directors for holding a board meeting to discuss the bonus issue of shares viz ratio in which shares will be issued, amount of accumulated reserves to be utilized for bonus issue, date on which it is to be announced, etc.
  • Pass board resolution to approve bonus issue.
  • Within 30 minutes, an intimate stock exchange meeting to consider an increase in capital through bonus issue of shares with the date of dispatch/credit of bonus shares. (For listed companies).
  • Call extra extraordinary general meeting for shareholders’ approval via ordinary resolution.
  • File MGT-14 within 30 days from the date of passing of ordinary resolution.
  • Again, hold a board meeting for the allotment of additional shares.
  • File return of allotment in Form PAS-3 with all resolutions and list of allottees within 30 days of allotment of additional shares.
  • Post completion of the process, issue allotment letters and share certificates within 60 days of the date of allotment of additional shares.

5.   Conclusion

To encourage more participation by investors and increase equity capital, bonus shares are issued by companies. Also, these days, many start-ups are going public by listing themselves on stock exchanges and bringing initial public offers. These start-ups will also prefer giving bonus shares to shareholders instead of dividend so that liquidity is not disturbed which otherwise can be reinvested in business and later on, can be paid as dividend with more profits. Any company intending to give bonus shares as a delight to shareholders has to adhere to various conditions and procedures prescribed in the Companies Act and regulations by SEBI.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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