by Bonus Shares are additional shares given to existing shareholders without any extra cost, based on the number of shares they already hold. These are issued by capitalizing a part of the company’s free reserves or securities premium. The issue of bonus shares is governed by Section 63 of the Companies Act, 2013. This section lays down the conditions and sources through which a company may issue bonus shares. Bonus issues help companies in retaining earnings, improving the stock’s liquidity, and signaling strong future prospects. However, they do not increase the company’s net worth but rather restructure it. Since bonus shares affect the capital structure, Companies Act, 2013 imposes specific regulations to ensure that the interests of shareholders and creditors are protected. The Act provides a clear legal framework under which companies can convert reserves into share capital while maintaining transparency and compliance with corporate governance norms.
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Section 63: Conditions for Issue of Bonus Shares
Section 63 of the Companies Act, 2013 is the primary legal provision governing the issue of bonus shares. According to this section, a company may issue fully paid-up bonus shares to its members from: (i) free reserves, (ii) the securities premium account, or (iii) the capital redemption reserve account. However, it must not issue bonus shares by capitalizing revaluation reserves. Also, the issue must be authorized by the company’s articles of association. If not, the articles must be amended before issuing bonus shares. A bonus issue must be recommended by the Board of Directors and approved in a general meeting by the shareholders. Importantly, bonus shares must be fully paid-up and cannot be issued in lieu of dividends. Section 63 also prohibits issuing bonus shares if the company has defaulted in the payment of any dues to its creditors or employees, thereby safeguarding stakeholders’ interests.
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Procedure for Issuing Bonus Shares
The procedure for issuing bonus shares under the Companies Act, 2013 involves several steps. Firstly, the Board of Directors must meet to consider and pass a resolution recommending the bonus issue. This is followed by obtaining shareholder approval through an ordinary resolution in a general meeting. If the company is listed, it must also comply with SEBI guidelines and stock exchange requirements. After approval, the company needs to file Form MGT-14 with the Registrar of Companies (RoC) for the resolution passed. Next, the company must issue a notice to shareholders stating the record date for eligibility. Bonus shares must be credited to shareholders within two months from the date of approval. Furthermore, any increase in authorized share capital due to the bonus issue requires prior approval and filing of Form SH-7. This structured procedure ensures legal compliance, transparency, and protection of investors’ rights during the bonus share issuance process.
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Prohibitions and Restrictions on Bonus Issue
Section 63 also outlines restrictions to ensure prudent financial practices. A company is prohibited from issuing bonus shares if it has defaulted in the repayment of any deposits, interest thereon, redemption of debentures, or statutory dues of employees. This ensures that companies prioritize their existing financial obligations before distributing reserves as bonus shares. Moreover, bonus shares cannot be issued partially paid — they must be fully paid-up. Another significant restriction is that companies cannot issue bonus shares in lieu of dividend; doing so would violate the spirit of capital restructuring. The Act also mandates that bonus shares must be made available to existing shareholders on a pro-rata basis, maintaining equality among shareholders. These restrictions are important for ensuring that the issue of bonus shares is not misused to manipulate share prices or mislead investors about the financial health of the company.
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Role of the Articles of Association and Board
The Articles of Association (AoA) of a company must authorize the issue of bonus shares. If the AoA do not contain such a provision, they must be amended by passing a special resolution in a general meeting before proceeding with the bonus issue. Once the AoA authorizes it, the Board of Directors plays a crucial role in initiating and recommending the issue. The Board must pass a resolution declaring the source of funds, the ratio of the bonus issue (e.g., 1:2 or 2:5), and the record date. The Board must ensure the company is compliant with all legal, financial, and regulatory obligations. The role of the Board is not only administrative but also fiduciary—they must act in the best interests of the company and its shareholders. Their decisions should reflect transparency, ethical governance, and long-term value creation. All board and shareholder resolutions must be properly documented and filed.
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SEBI Guidelines and Compliance for Listed Companies
For companies listed on a recognized stock exchange in India, issuing bonus shares must also comply with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. These guidelines mandate that the bonus issue must be made from free reserves built from genuine profits or securities premium collected in cash. Listed companies must not convert reserves created by revaluation of assets into bonus shares. They are also required to ensure that there is no pending fully or partly paid-up right issue, nor should the company have defaulted in any financial obligations. SEBI mandates that bonus shares must be credited within 15 days of the record date and that no new bonus issue is announced within one year of a previous bonus or rights issue. Further, proper disclosure through stock exchanges, investor communication, and corporate filings must be maintained. These regulations aim to protect investor confidence and uphold fair trading practices in the securities market.
