Concept of Distinct Person and Input Service Distributor (ISD) under GST

Distinct Person under GST

Under Section 25(4) and 25(5) of the CGST Act, 2017, establishments of a person having different GST registrations in different states or union territories, or within the same state for different business verticals (if separate registration is taken), are considered distinct persons for the purpose of GST.

Example:

A company “XYZ Pvt. Ltd.” has:

  • A registered office in Mumbai (Maharashtra)

  • A branch in Bangalore (Karnataka)

Even though it’s the same legal entity, these are treated as distinct persons under GST because they have separate GSTINs in different states.

Implications:

  1. Supply between distinct persons (even without consideration) is treated as supply under Schedule I of the CGST Act.

  2. Such supplies are taxable and require the issuance of a tax invoice.

  3. Inter-branch transfers (goods/services) across states are liable to IGST.

  4. Input Tax Credit (ITC) can be claimed on such tax paid, subject to eligibility.

Input Service Distributor (ISD)

As per Section 2(61) of the CGST Act, an Input Service Distributor (ISD) is an office of the supplier of goods or services or both which receives tax invoices for input services and distributes the credit of CGST, SGST, IGST, or UTGST to other units of the same organization having the same PAN.

ISD is only allowed to distribute credit of input services, not goods.

Example:

A company “ABC Ltd.” has:

  • Head Office in Delhi (registered as ISD)

  • Branches in Gujarat, Tamil Nadu, and Kolkata

If a common input service (e.g., advertisement, consulting) is billed to the head office in Delhi, the input tax credit (ITC) of that service is distributed by the ISD to the concerned branches based on their turnover ratio.

Key Features of ISD:

  1. Separate registration required under GST as ISD (even if already registered as a regular taxpayer).

  2. Only input services (not goods or capital goods) can be distributed.

  3. Distribution should be made via ISD invoice.

  4. Credit is distributed based on the turnover of recipient units in a State/UT.

Tax Distribution Rules:

Tax Type Received by ISD Distributed to Branch in Same State Distributed to Branch in Different State
CGST + SGST CGST + SGST IGST
IGST IGST IGST
  • Centralized management of common service invoices.

  • Proper allocation of credit to the correct unit.

  • Prevents accumulation of ITC at one location.

  • Ensures smooth compliance and reduces tax leakage.

Supply as per GST(Transfer)

Under the Goods and Services Tax (GST) regime in India, the term “Supply” holds paramount importance. GST is a supply-based tax, meaning it is levied on the supply of goods or services or both. As per Section 7 of the CGST Act, 2017, “supply” includes all forms of supply such as sale, transfer, barter, exchange, license, rental, lease, or disposal made for a consideration in the course or furtherance of business.

Among these, “Transfer” is one of the recognized forms of supply, and it has specific implications under GST.

✅ Meaning of Transfer under GST

Transfer under GST refers to a situation where ownership or possession of goods is passed from one person to another with or without consideration. It may be permanent or temporary, and in the context of GST, it is relevant when done in the course or furtherance of business.

The GST law identifies “transfer” as one of the actionable events on which GST is applicable, provided other conditions of “supply” are fulfilled.

✅ Types of Transfers Considered as Supply under GST

Here are some common types of transfers that are treated as supply under GST:

1. Transfer of Title in Goods (With Consideration)

When ownership in goods is transferred for a price or consideration, such a transaction is a taxable supply.

Example: A manufacturer selling machinery to a dealer.

2. Transfer of Right in Goods Without Transfer of Title

Sometimes, the right to use goods is transferred without transferring ownership. This is also treated as supply.

Example: Leasing of equipment where the ownership stays with the lessor.

3. Transfer Without Consideration (Deemed Supply)

Schedule I of the CGST Act lists situations where transfer without consideration is also treated as supply. These include:

  • Permanent transfer/disposal of business assets where ITC has been claimed.

  • Supply between related persons or between distinct persons (e.g., branches of the same company in different states), even without consideration.

Example: Head office sending goods to a branch in another state.

4. Transfer of Business Assets

When a business transfers assets permanently or temporarily (e.g., donating old computers to a school), and ITC was availed on those assets, such transfers are treated as supply and attract GST.

✅ Taxability of Transfer under GST

The following conditions must be satisfied for a transfer to be taxable under GST:

  1. There must be a supply of goods/services or both.

  2. The transfer must be in the course or furtherance of business.

  3. It must be made by a taxable person.

  4. It must occur for consideration (except in Schedule I cases).

✅ Transfer Between Branches or Units (Distinct Persons)

As per Section 25(4) of the CGST Act, establishments of the same entity in different states are treated as distinct persons. Hence, transfers of goods or services between them are considered supply even without consideration, and GST is applicable.

Example:

A company has a factory in Maharashtra and a depot in Delhi. The transfer of stock from the factory to the depot is treated as interstate supply and is liable to IGST, even though the transfer is internal and without consideration.

✅ Exceptions – Not Treated as Supply

Not all transfers are treated as supply. Certain transfers not in the course of business or without intention of commercial gain are not covered under GST. For example:

  • Gifts below ₹50,000 in a financial year to an employee.

  • Transfers of personal assets not related to business.

✅ Input Tax Credit (ITC) on Transfers

When a taxable person transfers goods/services as part of a supply (including inter-branch transfers), they can claim ITC on the tax paid, subject to eligibility. However, if assets are disposed of without consideration and ITC has been claimed earlier, GST is payable on such transfer.

✅ Documentation for Transfers

For tax compliance and audit purposes, the following documents must be maintained:

  • Tax invoice or delivery challan for branch transfers.

  • Accounting entries reflecting the transfer.

  • E-way bill for goods movement, where applicable.

Problems on Conversion of Single Entry into Double Entry

Here’s a practical example/problem on Conversion of Single Entry into Double Entry presented in a tabular format, illustrating how to calculate profit using the Statement of Affairs Method:

Example Problem (Using Statement of Affairs Method)

Particulars Amount (₹)
Opening Capital (as on 01-04-2024) 80,000
Closing Capital (as on 31-03-2025) 1,20,000
Additional Capital Introduced 10,000
Drawings during the year 15,000
Profit or Loss = ? ?

✅ Solution (Calculation of Profit)

Step Amount (₹)
Closing Capital 1,20,000
(-) Opening Capital (80,000)
——————————————– ————–
Increase in Capital 40,000
(+) Drawings 15,000
(-) Additional Capital Introduced (10,000)
——————————————– ————–
Profit for the Year 45,000

📌 Conclusion:

The profit for the year ended 31st March 2025 is ₹45,000, calculated using the Statement of Affairs method by reconstructing capital movement under the double-entry framework.

Need and Methods of Conversion of Single Entry into Double Entry

Conversion of Single Entry into Double Entry involves transforming incomplete records into a systematic and complete accounting system. It begins by preparing a Statement of Affairs to determine the opening capital. Then, missing details such as purchases, sales, expenses, and incomes are gathered from available records like cash book, bank statements, and invoices. These are used to reconstruct accounts under the double-entry principle, ensuring both debit and credit aspects are recorded. The process helps in preparing accurate final accounts, detecting errors, and maintaining legal compliance. This conversion improves financial reporting, control, and decision-making for growing businesses.

Need of Conversion of Single Entry into Double Entry:

  • Accurate Determination of Profit or Loss:

The single entry system provides only an estimated profit or loss by comparing capital at the beginning and end of a period. This estimate is often inaccurate. Converting to a double entry system allows for the preparation of a detailed Profit and Loss Account, which records all incomes and expenses, offering a precise calculation of net profit or loss. Accurate profit figures are crucial for making sound business decisions, satisfying investors, and meeting regulatory requirements.

  • Complete Financial Position:

The single entry system lacks a full picture of a business’s financial status, as it ignores many accounts such as liabilities and fixed assets. By converting to the double entry system, a Balance Sheet can be prepared, showing a clear view of assets, liabilities, and capital. This enables businesses to assess their true financial position, measure solvency, and monitor changes in net worth over time, which is essential for expansion, funding, or strategic planning.

  • Detection and Prevention of Errors and Frauds:

Due to the absence of a trial balance and incomplete records, the single entry system makes it difficult to detect accounting errors and fraudulent activities. The double entry system introduces a built-in verification mechanism, where every transaction has a debit and credit entry. This enables preparation of a trial balance, helping to identify discrepancies easily. Conversion ensures greater transparency, accountability, and internal control, making the financial system more secure and trustworthy.

  • Legal and Tax Compliance:

The single entry system is not legally recognized for tax reporting or statutory audits. Regulatory authorities require financial statements prepared under the double entry system to ensure accuracy and accountability. By converting, a business can maintain legally acceptable records that meet compliance requirements for income tax, GST, audits, and financial disclosures. This avoids legal penalties and enables the business to access government schemes, apply for loans, or bring in investors with confidence.

Methods of Conversion of Single Entry into Double Entry:

1. Statement of Affairs Method:

This method involves preparing a Statement of Affairs, which is similar to a Balance Sheet, at the beginning and end of the accounting period to estimate the opening and closing capital. The difference in capital (adjusted for drawings and additional capital introduced) helps determine profit or loss. Other missing figures like purchases, sales, and expenses are gathered from available records to reconstruct the accounts under double-entry. While it provides a starting point, this method relies heavily on estimates and may not be entirely accurate if the available data is incomplete or informal.

2. Conversion by Reconstructing Accounts:

In this method, available financial documents such as cash book, invoices, receipts, bank statements, and debtor-creditor records are used to reconstruct complete ledger accounts under the double-entry system. Separate accounts for purchases, sales, expenses, and incomes are prepared. Based on these, a trial balance is created, allowing preparation of proper financial statements. This method is more detailed and accurate, as it involves tracking both aspects of every transaction. It helps in transitioning a business from single to double-entry efficiently while ensuring completeness and compliance with accounting standards.

Issue of Rights and Bonus Shares

The issuance of shares by a company is one of the most common ways of raising capital. Companies can issue shares in different ways, such as initial public offerings (IPOs), private placements, and rights issues. Two other types of share issuance are bonus issues and bonus shares. Rights issue and bonus issue are two different ways of issuing shares by a company. A rights issue is a way for a company to raise additional capital by offering existing shareholders the right to buy new shares at a discounted price, while a bonus issue is a way to reward existing shareholders by issuing additional shares without raising any new capital. Both types of issues have their own advantages and disadvantages and should be carefully evaluated by the company before making a decision. It is important for investors to understand the implications of these issues before making any investment decisions.

Rights Issue of Shares:

A rights issue is a way for a company to raise additional capital by offering existing shareholders the right to buy new shares in proportion to their current holdings. The company offers the new shares at a discount to the current market price, making it an attractive option for existing shareholders. The rights issue is a type of public offering, but only existing shareholders can participate.

For example, if a company has 10 million shares outstanding and decides to issue 1 million new shares through a rights issue, it will offer one right to every ten shares held by existing shareholders. If a shareholder holds 1,000 shares, he or she will be offered 100 rights to purchase 100 new shares at a discounted price. The rights issue is usually offered for a limited period of time, and shareholders can choose to exercise their rights or sell them to other investors in the market.

Process of Rights Issue of Shares

  • Announcement:

The first step in a rights issue is the announcement by the company to its shareholders and the general public. The announcement includes details about the number of shares to be issued, the price at which they will be offered, and the time period during which shareholders can exercise their rights.

  • Record Date:

The company then fixes a record date, which is the date on which shareholders must hold the shares to be eligible for the rights issue. Shareholders who purchase shares after the record date are not eligible for the rights issue.

  • Issue of Rights:

Once the record date is fixed, the company issues the rights to existing shareholders based on the number of shares they hold. The rights are issued in proportion to the existing shareholding, and each right gives the shareholder the option to purchase a specified number of new shares at a discounted price.

  • Trading of Rights:

Shareholders can either exercise their rights or sell them in the market. The rights can be traded like regular shares, and their value is determined by the difference between the market price and the discounted price of the new shares.

  • Exercise of Rights:

Shareholders who wish to exercise their rights must submit an application and payment for the new shares before the expiration of the rights issue period. The payment must be made at the discounted price specified in the rights issue announcement.

  • Allotment of Shares:

After the expiration of the rights issue period, the company determines the total number of shares applied for and allot the new shares to the applicants. If there is an oversubscription, the company may allocate the shares on a pro-rata basis.

  • Listing:

The new shares issued through the rights issue are listed on the stock exchange, and existing shareholders who have exercised their rights can trade them in the market.

Benefits of Rights Issue of Shares

  • Capital Raising:

Rights issue is a quick and cost-effective way for a company to raise additional capital from its existing shareholders without incurring any underwriting or brokerage fees.

  • Dilution:

Rights issue does not result in dilution of ownership for existing shareholders since they have the option to purchase new shares in proportion to their current holdings.

  • Support:

Rights issue is usually offered at a discount to the market price, making it an attractive option for existing shareholders. It also shows the company’s commitment to its existing shareholders and provides a way for them to support the company’s growth plans.

Bonus Issue of Shares

Bonus issue is a way for a company to reward its existing shareholders by issuing additional shares without raising any new capital. The bonus shares are issued to existing shareholders in proportion to their current holdings. For example, if a company issues a 1:1 bonus issue, each shareholder will receive one additional share for every share they hold.

Process of Bonus Issue of Shares

  • Announcement:

The first step in a bonus issue is the announcement by the company to its shareholders and the general public. The announcement includes details about the number of shares to be issued, the ratio of the bonus issue, and the time period during which the bonus shares will be credited to shareholders’ accounts.

  • Record Date:

The company then fixes a record date, which is the date on which shareholders must hold the shares to be eligible for the bonus issue. Shareholders who purchase shares after the record date are not eligible for the bonus issue.

  • Allotment of Shares:

After the record date, the company credits the bonus shares to the eligible shareholders’ accounts in proportion to their current holdings. The bonus shares are usually credited within a few weeks after the record date.

  • Listing:

The bonus shares are listed on the stock exchange, and existing shareholders can trade them in the market.

Benefits of Bonus Issue of Shares

  • Rewarding Shareholders:

Bonus issue is a way for a company to reward its existing shareholders without raising any new capital. It shows the company’s commitment to its shareholders and provides a way to retain them.

  • Increase in Liquidity:

Bonus issue increases the liquidity of the company’s shares as the number of shares outstanding increases. This can result in higher trading volumes and better price discovery in the market.

  • Positive Signal:

Bonus issue is usually viewed as a positive signal by the market as it indicates that the company is in a strong financial position and expects to continue to perform well in the future.

Key differences between Rights Issue and Bonus Issue:

Feature Rights issue Bonus issue
Purpose To raise additional capital To reward existing shareholders
Eligibility Only existing shareholders are eligible Only existing shareholders are eligible
Discounted Price Offered at a discounted price No discounted price
Capital Raised Raises additional capital for the company No additional capital raised
Dilution of Ownership May result in dilution of ownership for shareholders No dilution of ownership
Listing of New Shares New shares are listed on the stock exchange New shares are listed on the stock exchange
Market Perception May be viewed as a negative signal by the market Usually viewed as a positive signal by the market

Corporate Accounting 3rd Semester BU B.Com SEP 2024-25 Notes

Unit 1 [Book]
Introduction, Overview of Redemption of Debentures Meaning, Importance and Objectives of Redemption VIEW
Methods of Redemptions:
Redemption Out of Profit VIEW
Redemption Out of Capital VIEW
Redemption by Payment in Lump Sum VIEW
Redemption by Instalments VIEW
Redemption by Purchase in the Open Market VIEW
Key Financial Adjustments in Redemption of Debentures VIEW
Provision for Premium on Redemption of Debentures VIEW
Treatment of Unamortized Debenture Discount or Premium VIEW
Accounting for Redemption of Debentures under Sinking Fund method VIEW
Journal Entries VIEW
Ledger Accounts VIEW
Preparation of Financial Statements VIEW
Post- Redemption as per Schedule III to Companies Act 2013 VIEW
Unit 2 [Book]
Introduction, Meaning and Definition of Underwriting, Importance of Underwriting in Raising Capital VIEW
Types of Underwriting: Firm Underwriting, Conditional Underwriting, and Sub-Underwriting VIEW
Role of Underwriters in Capital Markets VIEW
Ethical Practices in Underwriting VIEW
Key Clauses in Underwriting Agreements VIEW
SEBI Guidelines on Commission Rates and Responsibilities VIEW
Calculation of Liabilities and Commission: Gross Liability and Net Liability VIEW
Marked Applications and Unmarked Applications VIEW
Proportionate Liability in Syndicated Underwriting VIEW
Accounting for Underwriting: Treatment of Underwriting Commission in the Company’s Book and Settlement between Parties VIEW
Underwriter’s Account VIEW
Unit 3 [Book]
Introduction Meaning and Need for Valuation of Shares VIEW
Factors affecting Value of Shares VIEW
Methods of Share Valuation illustration on:
Intrinsic Value Method VIEW
Yield Method VIEW
Earning Capacity Method VIEW
Fair Value Method VIEW
Rights Issue VIEW
Valuation of Rights Issue VIEW
Valuation of Warrants: Australian Model, Shivaraman-Krishnan Model VIEW
Unit 4 [Book]
Statutory Provisions regarding Preparation of Financial Statements of Companies as per schedule III of Companies act. 2013 VIEW
List of the Companies follow Schedule III of companies Act 2013 VIEW
Preparation of Statement of Profit and Loss VIEW
Preparation of Statement of Balance Sheet VIEW
Unit 5 [Book]
Buyback of Shares Meaning, Objectives and Legal framework for buyback under the Companies Act, 2013 VIEW
Methods of Buyback:
Open Market Purchase VIEW
Tender offer of Buyback of Shares VIEW
Direct Negotiation / Targeted Buyback of Shares VIEW
Buyback through Book-building process VIEW
Accounting Treatment of Buyback in the Company’s Book VIEW
Bonus Issue Meaning, Definitions VIEW
Difference between Bonus Issue and Rights Issue VIEW
Reasons for issuing Bonus Shares VIEW
Advantages and Disadvantages for the Company and Shareholders for issuing Bonus Shares VIEW
Legal Framework, Relevant Provisions of the Companies Act, 2013 VIEW
SEBI Guidelines on Bonus Issues VIEW
Types of Bonus Issues (Capitalization of Reserves & Bonus Issues out of Free Reserves vs. Capital Reserves) VIEW
Sources of Financing Bonus Issues (Accumulated profits, Free reserves, or Securities premium account) VIEW

Sources of Financing Bonus Issues (Accumulated Profits, Free Reserves, or Securities Premium Account)

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.

Types of Bonus Issues (Capitalization of Reserves & Bonus Issues out of Free Reserves vs. Capital Reserves)

Bonus issues refer to the distribution of additional shares to existing shareholders at no extra cost, based on their current holdings. These shares are issued from a company’s free reserves or securities premium, converting retained earnings into share capital. Bonus issues increase the total number of shares while keeping the proportionate ownership unchanged. They enhance market liquidity, investor confidence, and perceived financial strength without affecting the company’s cash reserves. However, the market price per share adjusts downward post-issue. Bonus issues are governed by SEBI guidelines and the Companies Act, 2013 in India.

Types of Bonus Issues:

1. Capitalization of Reserves (Bonus Shares from Reserves)

Capitalization of reserves refers to the process where a company converts its accumulated reserves into share capital and issues bonus shares to existing shareholders. Instead of distributing cash dividends, the company allocates additional shares to shareholders in proportion to their existing holdings. These reserves may include free reserves, securities premium reserves, or capital redemption reserves, but not revaluation reserves.

The advantage of this approach is that it enhances investor confidence while maintaining liquidity within the company. By issuing bonus shares, the company increases its share capital without affecting cash flow. However, since bonus shares do not bring additional funds into the company, they do not improve financial strength directly. The market price of shares generally adjusts downward after a bonus issue, ensuring that shareholders’ wealth remains unchanged.

Companies opt for capitalization of reserves when they wish to reward shareholders, improve liquidity, or maintain an investor-friendly image while retaining earnings for future expansion.

2. Bonus Issues out of Free Reserves vs. Capital Reserves

Bonus shares can be issued from free reserves or capital reserves, each having distinct characteristics.

  • Bonus from Free Reserves: Companies commonly issue bonus shares from free reserves, retained earnings, or securities premium. These reserves represent accumulated profits, making them ideal for rewarding shareholders. Since these are earned profits, SEBI permits issuing bonus shares from them. It reflects a company’s strong financial performance and long-term stability.

  • Bonus from Capital Reserves: Capital reserves arise from non-operating profits, such as asset revaluation or government grants. SEBI restricts issuing bonus shares from revaluation reserves, as they do not represent real earnings. Companies can issue from capital redemption reserves, which arise when preference shares are redeemed.

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.

Legal Framework, Relevant Provisions of the Companies Act, 2013

The Companies Act, 2013 governs corporate regulations in India and establishes the legal framework for the incorporation, management, and operations of companies. It aims to enhance corporate governance, transparency, and compliance while protecting stakeholders’ interests. Below are key legal provisions under the Act, categorized by their relevance.

Incorporation and Registration of Companies (Sections 3 to 22):

The Companies Act, 2013 provides the legal foundation for the formation and registration of companies.

  • Types of Companies: The Act recognizes public, private, and one-person companies (Section 2).

  • Memorandum & Articles of Association (MOA & AOA): Companies must draft and file these documents during incorporation.

  • Certificate of Incorporation: Issued by the Registrar of Companies (RoC) as proof of existence.

  • Corporate Identity Number (CIN): Every registered company receives a unique CIN.

These provisions ensure that companies operate with a clear legal identity and defined structure.

Corporate Governance and Board of Directors (Sections 149 to 178)

The Act emphasizes strong corporate governance to ensure ethical and efficient business operations.

  • Board Composition (Section 149):

    • A listed company must have at least one-third independent directors.

    • At least one woman director is required in certain companies.

  • Duties of Directors (Section 166):

Directors must act in good faith and in the best interest of the company and stakeholders.

  • Audit Committee (Section 177):

Mandatory for large companies to oversee financial reporting and compliance.

These provisions safeguard transparency and accountability in corporate decision-making.

Share Capital and Securities (Sections 43 to 72)

The Act defines regulations for issuing shares and securities to protect investors.

  • Types of Share Capital (Section 43):

Equity shares and preference shares are the primary categories.

  • Issue of Shares (Section 62):

Companies can issue rights shares, bonus shares, and preferential allotments.

  • Buyback of Shares (Section 68):

A company may repurchase its shares under specific conditions, subject to a 25% limit of its paid-up capital.

  • Transfer and Transmission of Shares (Section 56):

The process must be documented and comply with statutory requirements.

These provisions regulate capital structure and protect shareholders’ rights.

Financial Statements, Audit, and Disclosures (Sections 128 to 138):

To ensure financial transparency, companies must maintain proper accounting records and undergo regular audits.

  • Books of Accounts (Section 128):

Companies must maintain books at their registered office.

  • Statutory Audit (Section 139):

Every company, except a few small firms, must appoint an independent auditor.

  • Board’s Report (Section 134):

Includes financial performance, corporate social responsibility (CSR), and risk management details.

  • Internal Audit (Section 138):

Required for large and listed companies to strengthen financial control mechanisms.

These provisions ensure accurate financial reporting and prevent fraudulent activities.

Mergers, Acquisitions, and Corporate Restructuring (Sections 230 to 240)

The Act provides a structured framework for corporate restructuring, ensuring legal compliance.

  • Compromise and Arrangements (Section 230):

Companies can enter into agreements with creditors and shareholders for restructuring.

  • Mergers and Amalgamations (Section 232):

Court or tribunal approval is required for mergers.

  • Takeovers and Oppression (Section 241):

Shareholders can seek legal remedies against oppressive management practices.

These provisions facilitate smooth business restructuring while protecting stakeholders’ rights.

Corporate Social Responsibility (CSR) (Section 135)

CSR is a mandatory provision under the Companies Act, 2013, ensuring that businesses contribute to societal development.

  • Applicability:

Companies with a net worth of ₹500 crores, a turnover of ₹1000 crores, or a net profit of ₹5 crores must spend 2% of their average net profits on CSR activities.

  • CSR Committee:

Companies must form a CSR Committee to oversee and implement projects in education, healthcare, and environmental sustainability.

This provision encourages ethical corporate practices and social welfare initiatives.

Investor Protection and Shareholder Rights (Sections 91 to 127)

To ensure fairness in corporate dealings, the Act provides multiple safeguards for shareholders.

  • Annual General Meeting (AGM) (Section 96):

Every company, except one-person companies, must hold an AGM annually.

  • Voting Rights (Section 47):

Shareholders have proportional voting rights based on their equity holdings.

  • Declaration of Dividends (Section 123):

Dividends must be declared from company profits and transferred to shareholders.

  • Unpaid Dividend (Section 124):

Unclaimed dividends must be transferred to the Investor Education and Protection Fund (IEPF).

These provisions ensure transparency and safeguard shareholders’ interests.

Winding Up and Liquidation of Companies (Sections 270 to 365)

The Act defines the legal process for closing a company.

  • Voluntary Winding Up (Section 304):

Companies can dissolve voluntarily if shareholders approve.

  • Compulsory Winding Up (Section 271):

Ordered by the tribunal due to insolvency, fraud, or non-compliance with regulations.

  • Insolvency and Bankruptcy Code (IBC):

The IBC governs financial distress resolution for companies.

These provisions ensure a structured and fair exit strategy for failing businesses.

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