by Bonus issues are funded through a company’s internal reserves rather than fresh capital. The primary sources include Accumulated profits, Free reserves, and the Securities premium account. Accumulated profits represent retained earnings available for capitalization. Free reserves consist of surplus funds not earmarked for liabilities, ensuring financial stability. The securities premium account includes excess amounts received from share issuances, which can be used under Section 52 of the Companies Act, 2013. These sources enable companies to issue bonus shares without affecting cash flow while enhancing shareholder value and market liquidity.
Sources of Financing Bonus Issues:
1. Accumulated Profits
Accumulated profits refer to the retained earnings that a company has generated over time after paying dividends and other obligations. These profits are reinvested into the business and can be capitalized to issue bonus shares. Using accumulated profits for a bonus issue allows a company to reward shareholders without impacting cash reserves. It enhances investor confidence and portrays financial stability. However, since these profits are already accounted for within the equity section, issuing bonus shares does not provide additional funds but improves share liquidity. The Companies Act, 2013, allows companies to capitalize a portion of their accumulated profits to issue bonus shares, subject to regulatory approvals and compliance with financial norms.
2. Free Reserves
Free reserves consist of the profits available for distribution, which are not earmarked for specific liabilities. These reserves arise from a company’s surplus earnings and are often allocated toward growth, dividend payouts, or bonus issues. Capitalizing free reserves for bonus issues increases share capital while maintaining overall equity. It benefits shareholders by enhancing their investment value without diluting ownership. Companies must ensure that the reserves used for the bonus issue are truly free and not encumbered by liabilities. SEBI and the Companies Act, 2013, regulate the usage of free reserves for issuing bonus shares, ensuring transparency and financial prudence.
3. Securities Premium Account
The securities premium account consists of the extra amount received over the nominal value of shares issued at a premium. Companies can use this premium to finance bonus issues, as per Section 52 of the Companies Act, 2013. Utilizing the securities premium for a bonus issue helps capitalize on excess funds received from shareholders, enhancing the company’s shareholding structure without impacting its operational liquidity. This method reduces the per-share value, making shares more affordable to investors while increasing market activity. However, companies must follow SEBI guidelines and legal provisions ensuring fair utilization.
