Pursuant to the provisions of Section 78 of the Companies Act, 1956, securities premium account can be used in paying up unissued shares of the company to be issued to its members as fully-paid bonus shares. Other free reserves created from out of the profits actually earned during earlier years like general reserve, capital redemption reserve account [Section 80(5)], devolvement rebate reserve etc. can be utilised by company for issue of fully paid bonus shares to its members.
Fund flow is not affected adversely. Market value of the Company’s shares comes down to their nominal value by issue of bonus shares. Market value of the members’ shareholdings increases with the increase in number of shares in the company. Bonus shares is not an income. Hence it is not a taxable income. Paid-up share capital increases with the issue of bonus shares.