Capitalisation Of Reserves Through – Bonus Issue

To Capitalized profit of the Company and to provide additional shares given to the current shareholders without any additional cost, on the proportionate basis of Shares hold by the members of the Company. These are company’s accumulated earnings which are not given out in the form of dividends, but are converted into free shares.

Bonus shares capitalizes a part of reserves (retained earnings) to bring:

  1. A price of share back to a more manageable amount, thus enhancing its market ability. The number of shares held by each shareholder increases, the value of the total shareholding remains the same as before the bonus issue.
  2. The percentage of holding also remain intact.

The concept is similar to a rights issue, except that bonus shares are created by transferring money from a company’s reserves into its equity capital (capitalization of reserves). This is useful for a company that have cash reserve and capitalized its profit.

Companies issue bonus shares to increase its Equity base and reduce the price per shares. Itencourage retail participation to buy Shares. But the overall capital remains the same even if bonus shares are declared.

For example, the company declare Bonus shares in the ratio of 1:4, i.e, every member will have 5 Shares now against 1 shares held in the Company. These are company’s accumulated earnings which are not given out in the form of dividends, but are converted into free shares.

There was no specific section or provision under the Companies Act, 1956 dealing with Bonus Shares. As per SEBI Act, unlisted Private Limited Companies and Public Limited Companies were free to issue Bonus Shares if there were sufficient reserves to match the issue of Bonus Shares.
To bring in sanctity to the Issue of Bonus Shares, The Companies Act, 2013 has introduced Section 63 to deal exclusively with Bonus Shares

Issue of bonus shares is covered under Section 63 of the Companies Act, 2013 read with rule 14 of The Companies (Share Capital and Debentures) Rules, 2014.

Source for issue of Bonus Shares:

As per Section- 63(1) a company may issue fully paid up bonus shares to its members out of following:

  1. Free reserves.
  2. Securities Premium Account.
  3. Capital Redemption Reserve Account.

Source from which Bonus Shares can’t issue:

  1. No issue of bonus shares shall be made capitalizing reserves created by the revaluation of assets. (Company can’t issue Bonus Shares out of reserve create from revaluation of assets).
  2. The Company shall not issue shares in lieu of Dividend.

Procedure For Issue Of Bonus Shares

  1. Call the Board Meeting
    • As per Section 173(3): Issue Notice of atleast 7 days for calling meeting of Board of Directors.
  2. Hold the Board Meeting
    • Check the Quorum as per Section 174(1): Quorum for the Meeting of Board of Directors is 1/3rd of total strength of Board or 2 directors, whichever is higher.
    • Place before the Board Resolution for issue of Bonus Shares.
    • Pass Board Resolution for issue of shares.
    • Decide the Ration of Shares offering to share holders.
    • Fixing the date, time, and venue of the general meeting and authorizing a director or any other person to send the notice for the same to the members.
    • Provisions of the Section 101 of the Companies Act 2013 provides for issue of notice of EGM in writing to below mentions atleast 21 days before the actual date of the EGM :
      • All the Directors
      • Members
      • Auditors of Company
    • The notice shall specify the place, date, day and time of the meeting and contain a statement on the business to be transacted at the EGM.
    • Authorize a director to do all the work relating to issue notice of right issue.
  3. File MGT-14:
    • File e-form- MGT-14 with in 30 days of Passing of Board Resolution for issue of shares.
  4. Convene A General Meeting:
    • Check the Quorum.
    • Check whether auditor is present, if not. Then Leave of absence is Granted or Not. (As per Section- 146).
    • Pass Ordinary Resolution for bonus issue of shares.
  5. Call the Board Meeting: As per Section 173(3): Issue Notice of atleast 7 days for calling meeting of Board of Directors.
  6. Filling of e-Forms File PAS-3:
    • File e-form PAS-3 with in 30 days of passing of Board Resolution for allotment of shares.
  7. Issue Share Certificates:
    • Company will issue share certificate to the share holders with in 2 month from the date of allotment of shares and payment of Stamp duty on the same.

Note For Issue Of Bonus Shares

  1. Check whether Authorized capital is sufficient for issue of Bonus Shares, if not, need to alter capital Clause of MOA
  2. Check Provision for Bonus issue in Article of Association of Company, if not, need to alter AOA of the Company.
  3. All the shares are fully paid-up, in case of partly paid-up, them first make them fully paid-up.
  4. No Default of any payment of interest or principal in respect of fixed deposit or debt securities.

Conditions For Issue Of Bonus Shares

  • Articles must contain provision for issue of bonus shares [As per Section-63(2) (a)].
  • Bonus issue must be authorised by the members of the company (by passing of Ordinary Resolution) on recommendation of Board.
  • Company should not have defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it and no defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus.

It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new FDI norms.

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By | 2018-12-07T15:52:27+00:00 October 25th, 2017|Capital Markets & Listings|0 Comments

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