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What is Bonus Share? Procedure to the issue of Bonus Shares
Dashmeet Kaur
| Updated: Apr 08, 2020 | Category: SEBI Advisory

What is Bonus Share? Procedure to the issue of Bonus Shares

Have you ever wondered what a company does with its accumulated earnings or when its shares price goes up? Often it issues bonus shares to its existing shareholders based on the shares owned by them. Such shares are additional shares that a company provides to its current shareholders without any additional cost. These are the company’s accumulated earnings that are not given out in the form of dividends but are converted into free or bonus shares. For instance, if a shareholder owns 200 shares of a company that declares a bonus of 4:1, then for every one share, he will get four bonus shares that turn out to be 800 free shares. Thus, his total shares will rise to 1000 shares. This write-up will act as a complete guide to the issue of Bonus Shares.

An overview of Bonus Shares 

Scrip dividends or Bonus Shares refer to the accumulated earnings of a company that gets converted into additional or free shares and given to the current shareholders in proportion to the shared they hold without any additional cost imposed. Only those companies can issue a Bonus Share that has accumulated large free reserves and hasn’t set them apart for a specific purpose. 

Bonus Shares are issued to shareholders when the companies are deprived of cash to pay them. It helps to restructure company reserves and increases the share capital of the company.  However, the issue of a bonus share does not have any impact on the company’s net assets. Shareholders can choose to sell the shares to meet their liquidity needs.

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Types and sources of Bonus Shares

There are two types of Bonus Shares that can be issued using different sources, let’s take a look at them: 

  • Fully Paid Bonus Share– When the company distributes its bonus shares free of cost in proportion to the holding of Shareholders, it is known as Fully Paid Bonus Shares. Such shares can be issued from these sources:
    • Capital Redemption Reserve;
    • Security Premium** (realised in cash);
    • Capital Reserve* (realised in cash);
    • Profit & Loss Account;
    • General Reserve;
    • Investment Allowance Reserve;
    • Sinking Fund for Redemption of Debentures (post redemption);
    • Development Rebate Reserve.

Note- *Capital Reserve and *Security Premium not realised in cash cannot be used for issuing the Bonus Shares.

  • Partly Paid Bonus Shares: When the bonus is applied to convert partly paid shares into fully paid shares, it is called Partly Paid-up Bonus Shares. These are the sources of issuing these shares:
    • Capital Reserve* (realised in cash);
    • Profit & Loss Account;
    • General Reserve;
    • Investment Allowance Reserve;
    • Development Rebate Reserve;
    • Sinking Fund for Redemption of Debentures (post redemption).

Note: Capital redemption account and security premium cannot be used to issue Partly Paid Bonus Shares. It is legally permissible to first utilize capital reserve over revenue reserve, in case there is a choice between the two. 

When can a company issue Bonus Shares?

Here are the circumstances under which the companies yield the benefit of issuing Bonus Shares: 

  • Excess of Capital- When a company is making profits, it keeps on increasing the accumulated earnings and reserves. Thus, the actual capital employed exceeds the amount of share capital. So the profit generated becomes much more than the share capital. Therefore, to avoid this imbalance in the capital structure, the company distributes a portion of free reserve among the existing shareholders by issuing Bonus Shares.
  • Voting Power– The benefits of issued Bonus Shares are increased stock in hand, better trade, low risk of being voted out while performing well in the market. Since shares can’t be played as dividends and this makes it a rational method of handling the burden of dividend tax.
  • Liquidity of the Stock– To increase stock liquidity and distribute the available cash in a neutral way, the Bonus Shares are issued. Most of the companies encourage retail participation and get their equity base increased by issuing bonus shares while making a positive image in the market showing the company promotes long-term growth strategy.
  • Shareholder Value- If the company falls in a situation where it cannot pay any cash then, bonus issue is the only way that company can consider to satisfy the shareholders’ dividend demand. Bonus share reflects the entire health of the company. The company adjusts its share price according to the offered bonus ratio.

SEBI guidelines for issue of Bonus Shares 

These are the principle guidelines of the Securities and Exchange Board of India for the issue of Bonus Shares:

  • The Bonus Shares must only be issued out of the company’s free reserves.
  • No Dilution of other issues by the Bonus Shares.
  • Any reserve formed by the revaluation of an asset can’t be capitalized for issuing Bonus Shares.
  • Bonus Shares cannot be issued in lieu of Dividends.
  • The Company must implement the proposal of Bonus Shares within a period of 6 months of the date of approval of the proposal in the Board Meeting.
  • Once made the company cannot withdraw the Bonus Shares proposal.
  • There should be no default in the payment of interests of the Company issuing Bonus Shares.
  • Issue of Bonus must not be done within 12 months of the issuing Public Shares.
  • The company must have a suitable provision for the Capitalization of Reserves in the  (AoA) Articles of Association. If no such provision is there, then alter the AoA accordingly.
  • If needed, the Company can increase its authorized capital to permit the proposal pf Bonus Shares.   

Step by step procedure for issuing a Bonus Share

Below is the procedure to be followed to issue the bonus shares: 

  1. Call for Board Meeting– Circulate a notice to inform about the scheduled board meeting of members in not less than 7 days. Below points should be considered in the board meeting:
    1. Section 174(1) mentions that 1/3rd of the total strength of the Board should be Quorum of the Board Meeting.
    2. Decide the ratio of issuing the Bonus Shares. 
    3. The resolution of the board meeting should be conveyed.
    4. The Date with time and place for the EGM – Extraordinary General Meeting should be decided
    5. A notice for the EGM should be issued mentioning the entire details of the EGM along with authorized director for the issue of right issue.
    6. As per the Section 101 of Companies Act, 2013, the notice of EGM should be issued at least 21 days before the scheduled date for EGM.
  1. File Form MGT-14– e-form MGT-14 should be completely filled after the board resolution gets passed to issue the bonus shares. The days limit for the same is 30 days after the passed resolution. The passed resolution should be well attached along with the MGT -14 form.
  1. Holding the EGM – Extraordinary General Meeting: These things must be considered during the EGM:
    1. The Quorum of the Meeting.
    2. Ensure if the Auditor is present. In case the auditor is absent then, check if the leave is approved or not as stated in Section 146 of Companies Act, 2013.
    3. If resolution is passed for Bonus Shares Issue.
    4. If resolution is passed for Allotment of Bonus Shares.
  1. Filing e-Forms: File for PAS-3 once the EGM is done and the resolution is passed for bonus share issues. The form PAS-3 should be attached with the  below mentioned documents:
    1. The resolution for Allotment and issue of bonus shares.
    2. The entire list of all the allottees with all the details mentioned as Name, Address, Occupation and the allotted securities to each.
  1. Issuing the Share Certificate– After allotting the shares, it is necessary for every company to issue bonus share certificate to its shareholders. The time frame for the same is 2 months.

Conclusion

The Companies Act, 2013 mentions the process to issue of Bonus Shares to the shareholders. The AoA must authorize the issue and once the Bonus share recommended, there is no chance to withdraw it. The process of issuing the bonus shares is time-consuming.

Therefore, you must take the professional guidance of Swarit Advisors, a reputed legal consultancy firm.

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Dashmeet Kaur

Dashmeet Kaur is an experienced content writer, having proficiency in writing Legitimate content with comprehensive research. She also has a keen eye to detail and incorporating accurate facts.

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