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Issue of Bonus Shares

Issue of Bonus Shares

Bonus shares are additional shares given to the existing shareholders without any additional cost, based upon the number of shares that a shareholder owns.

Background –

Companies Act, 1956 did not have any provisions regulating the issue of bonus shares. Private Limited Companies and Unlisted Public Companies were free to issue bonus shares if they have free reserves to cover the bonus issues. However, Listed Public Companies intending to issue bonus shares have to comply with the SEBI (Disclosure and Investor Protection) Guidelines, 2000. Currently, the Companies Act, 2013 has introduced the regulations for bonus issues through Section 63 of the Companies Act, 2013.

Section 63 of the Companies Act, 2013 –

1. Sources from which bonus shares may be issued – A company may issue fully paid-up bonus shares to its members out of –

(a) its free reserves;

(b) the securities premium account; or

(c) the capital redemption reserve account.

2. Sources from which bonus shares will not be issued –

(a) No issue of bonus shares will be made out of its revaluation reserves

(b) Bonus shares shall not be issued in lieu of dividend.

3. Other regulatory measures – No company shall capitalize its profits or reserves for the purpose of issuing fully paid bonus shares unless-

(a) it is authorized by its articles;

(b) the Board has recommended such issue in the general meeting of the company;

(c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;

(d) it has not defaulted in respect of payment of the statutory dues of the employees;

(e) the partly paid-up shares, if any outstanding on the date of allotment, are fully paid-up;

(f) once the decision of the Board recommending the bonus issue has been announced, it shall not subsequently withdraw the same.

SEBI Guidelines on Issue of Bonus Shares –

A listed company proposing to issue bonus shares shall comply with the following:
1. (a) No company shall, pending conversion of Fully Convertible Debentures (FCDs)/Partly Convertible Debentures (PCDs), issue any shares by way of bonus unless similar benefit is extended to the holders of such FCDs/PCDs, through reservation of shares in proportion to such convertible part of FCDs or PCDs.
    (b) The shares so reserved may be issued at the time of conversion of such debentures on the same terms on which the bonus issues were made.
 
2. The bonus issue shall be made out of free reserves built out of the genuine profits or share premium collected in cash only.
 
3. Reserves created by revaluation of fixed assets are not capitalized.
 
4. The declaration of bonus issue, in lieu of dividend, is not made.
 
5. The bonus issue is not made unless the partly-paid shares, if any existing, are made fully paid-up.
 
6. The Company –

(a) has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption thereof and
(b) has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity, bonus etc.
 
7. A company which announces bonus issue after the approval of board of directors and does not require  shareholders’ approval for capitalization of profits or reserves for making bonus issue as per the Articles of Association, shall implement bonus issue within fifteen days from the date of approval of the issue by the board

of directors of the company and shall not have the option of changing the decision.
In cases where the company is required to seek shareholders’ approval for capitalization of profits or reserves
for making bonus issue as per the Articles of Association, the bonus issue shall be implemented within two months from the date of the meeting of the board of directors wherein the decision to announce bonus was taken subject to shareholders’ approval.
 
8. (i) The Articles of Association of the company shall contain a provision for capitalization of reserves, etc
     (ii) If there is no such provision in the Articles the company shall pass a Resolution at its general body meeting       making provisions in the Articles of Associations for capitalization.
 

9. Consequent to the issue of Bonus shares if the subscribed and paid-up capital exceed the authorized share capital, a Resolution shall be passed by the company at its general body meeting for increasing the authorized Capital.

 
10. A certificate duly signed by the issuer company and counter signed by statutory auditor or by Company Secretary in practice to the effect that the SEBI provisions regarding issue of bonus shares have been complied with shall be forwarded to the Board.

Issue of Bonus Shares

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