Bonus issue means an issue of additional shares to existing shareholders free of cost in proportion of their existing holding.
What are bonus shares?
It is defined as issue of shares at no cost to current shareholders in a company ,based upon the number of shares that the shareholders already owns.
In other words, no new funds are raised with a bonus issue. While the issue of these shares increases the the total number of share issued and owned. It does not increase the net worth of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholders remains constant.
Further, bonus issue is known as ‘capitalization of profits’. Capitalization of profits refers to the process of converting profits or reserves into paid up capital.
Moreover, Ccmpany may capitalize its profits or reserves which otherwise are available for distribution as dividends among the members by issuing fully paid bonus share to the members.
However, if the subscribed and paid up capital exceeds the authorized share capital as a result of bonus issue. A resolution shall be passed by the company at its general meeting for increasing the authorized capital.
Further, a return of bonus issue along with a copy of resolution authorizing the issue of bonus shares. And is also required to be filed with the Registrar of Companies.
Example
Sun pharma announced bonus issue to its shareholders in the ratio of 2:3 i.e. 2 shares for every 3 shares held. Shareholders Y has 6,000 shares before announcement of bonus issue. How much shares would have after bonus issue?
Solution:
Company announced bonus issue in ratio of 2:3
Shareholder Y will be entitled to have 4,000 bonus shares ( 6,000 shares /3x 2)
Total number of share Y has after bonus issue 10,000 (6,000+4,000) .
Provision of companies act 2013 for issue of bonus shares
Section 63 of the companies Act, 2013 deals with the issue of bonus share. According to sec. 63(1) , a company may issue fully paid-up bonus share t its members in any manner whatsoever, out of:
- Its free reserves;
- the securities premium account ; or,
- capital redemption reserve account;
Provided that no issue of bonus shares shall be made by capitalizing reserves created by the revaluation of assets.
Further, as per section 63(2) provides that no company shall capitalize its profits or reserves for the purpose of issuing fully paid-up bonus shares under sub-section (1), unless –
- it is authorized by its articles;
- it has, on the recommendation of the board , been authorized in the general meeting of the company;
- it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;
- it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus;
- the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up.
- it complies with such conditions as may be prescribed.
The company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same.
However, section 63(3) of companies act 2013, provides that the bonus shares shall not be issued in lieu of dividend.
What are the conditions for bonus issue?
Subject to the provisions of the companies act 2013 or any other applicable , a listed issuer shall be eligible to issue bonus shares to its members if:
- it is authorized by its articles of association for issue of bonus shares, capitalization of reserves, etc.
Provided that if there is no such provision in the articles of association. The issuer shall pass a resolution at its general body meeting making provisions in the articles of associations for capitalization of reserve.
- it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it.
- it has not defaulted in payment of statutory dues of the employees such as contribution to provident fund, gratuity and bonus.
- any outstanding partly paid shares on the date of the allotment of the bonus shares, are made fully paid-up.
- any of its promoters or directors is not a fugitive economic offender.
