SEBI Guidelines on Bonus Issues

Securities and Exchange Board of India (SEBI) regulates the issuance of bonus shares to ensure fair practices, protect investors’ interests, and maintain market stability. SEBI has established guidelines for companies issuing bonus shares under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). These guidelines ensure transparency, fair treatment of shareholders, and prevent price manipulation.

Eligibility Criteria for Issuing Bonus Shares

SEBI mandates that companies must meet certain eligibility criteria before issuing bonus shares.

• The company must ensure that its reserves are sufficient for the bonus issue without affecting its financial stability.

• The company must not have defaulted on any statutory payments, including loans, deposits, or interest on outstanding debt.

• It must not have defaulted in the payment of dues to employees, statutory bodies, or financial institutions.

• The bonus issue must be authorized by the company’s Articles of Association (AOA).

These criteria ensure that only financially stable companies issue bonus shares.

Conditions for Issuing Bonus Shares

SEBI has set specific conditions that companies must comply with while issuing bonus shares.

• The issue must be fully paid-up shares and not convertible into any other form of security.

• The company must ensure that bonus shares are issued out of free reserves, capital redemption reserves, or securities premium accounts.

• The company should not have any outstanding convertible debt instruments at the time of issuing bonus shares.

• The company must ensure that the bonus issue does not dilute its financial position or create undue price fluctuations.

These conditions ensure the fairness and authenticity of bonus share issuance.

Approval Process for Bonus Issues

The issuance of bonus shares requires approval from the company’s board and shareholders.

• The company’s board of directors must first approve the bonus issue in a meeting.

• After board approval, the company must obtain shareholder approval in a general meeting through an ordinary resolution.

• If the Articles of Association (AOA) do not permit bonus issues, the company must amend the AOA before proceeding.

• The company must inform stock exchanges about the approval and proposed record date for the bonus issue.

This process ensures transparency and compliance with legal formalities.

Record Date and Trading Restrictions

SEBI mandates that companies must set a record date for determining eligible shareholders.

• The record date is the cut-off date on which shareholders must hold shares to be eligible for the bonus issue.

• The company must notify stock exchanges at least two working days before the record date.

• After the record date, the shares are traded ex-bonus, meaning new buyers will not receive the bonus shares.

• The bonus shares must be credited to eligible shareholders within 15 days from the record date.

This ensures clarity for investors and prevents market manipulation.

Disclosure and Regulatory Filings:

SEBI requires companies to make necessary disclosures and filings related to bonus issues.

• Companies must file an intimation to stock exchanges about the proposed bonus issue and record date.

• The company must disclose the rationale, impact on financials, and details of the reserves utilized.

• Any material changes or delays in the bonus issue must be promptly reported to SEBI and stock exchanges.

• Companies must publish press releases and investor notifications about the bonus issue.

These disclosures maintain transparency and ensure that investors have accurate information.

Restrictions on Bonus Issues:

SEBI imposes certain restrictions to prevent the misuse of bonus issues.

• Companies cannot withdraw or modify a bonus issue after it is announced.

• Bonus shares must be issued only from free reserves and not from revaluation reserves.

• If the company has defaulted on loans or interest payments, it cannot issue bonus shares.

• Companies must not issue bonus shares to promoters selectively; all shareholders must be treated equally.

These restrictions prevent misuse of bonus issues and ensure fair treatment for all shareholders.

Listing and Trading of Bonus Shares:

Bonus shares must be listed and made tradable as per SEBI regulations.

• The company must list the bonus shares on stock exchanges within two months from the date of approval.

• The shares must be credited to shareholders’ demat accounts before trading begins.

• Companies must ensure that the bonus shares carry the same rights as the original shares.

• The trading price adjusts automatically to reflect the increased number of shares in the market.

This ensures smooth market operations and liquidity for investors.

Impact of Bonus Issues on Stock Prices:

SEBI ensures that bonus issues do not lead to artificial price manipulation in the stock market.

• Stock prices typically adjust after a bonus issue due to increased supply.

• SEBI monitors price movements to prevent suspicious trading activities before or after the bonus announcement.

• Companies must disclose the bonus issue plan in advance to prevent insider trading.

• The impact of bonus issues on a company’s financial performance must be explained in investor reports.

This ensures that bonus issues do not cause unnecessary volatility in the stock market.

Tax Implications of Bonus Issues:

SEBI does not directly regulate taxation, but companies must consider tax implications while issuing bonus shares.

• Bonus shares are not taxable at the time of issuance in the hands of shareholders.

• However, when sold, capital gains tax applies on the selling price minus the original purchase price.

• SEBI requires companies to disclose any tax implications in their investor communications.

• Shareholders must maintain proper records to calculate capital gains tax on future sales.

Understanding tax implications helps investors make informed financial decisions.

Penalties for Non-Compliance with SEBI Guidelines:

SEBI imposes strict penalties for companies that violate bonus issue regulations.

• Companies failing to comply with SEBI guidelines may face fines, trading suspensions, or legal actions.

• If companies delay the issuance of bonus shares beyond the prescribed time, SEBI can impose penalties.

• Shareholders can file complaints with SEBI if they face unfair practices related to bonus issues.

• Stock exchanges monitor compliance and report any violations to SEBI for further action.

These penalties ensure that companies follow fair and ethical practices in issuing bonus shares.