When a company accumulates a large surplus, it may convert this surplus into capital and divide it among the members in proportion to their rights. This is done by issuing fully paid shares representing the increased capital. Such shares are termed as bonus shares. The shareholders to whom the bonus shares are allotted have to pay nothing. The purpose is to capitalize profits which are otherwise available for distribution.
If the articles of association permits, a company can capitalize its surplus profits and reserves and issue fully paid shares of a nominal value, equal to the amount capitalized, to its shareholders. Fully paid “bonus shares” are thus not a gift; they are merely a distribution of capitalized undivided profit.
It would be a misnomer to call the recipients of bonus shares as donees of shares from the company. When fully paid-up bonus shares are issued to the shareholders, the profits are capitalized and the existing shareholders, instead of receiving any moneys out of the undistributed profits receive pro rata fresh shares.
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Bonus shares can be issued only when the following conditions are satisfied:
(i) The articles of association permits the issue of bonus shares;
(ii) Company has sufficient undistributed profits;
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(iii) The Board passes a resolution for issuing bonus shares;
(iv) The proposal of the board regarding issue of bonus shares has been approved by the members in the general meeting;
(v) SEBI (ICDR) Regulations, 2009 (applicable to listed companies only) are complied with.
The company has to file within 30 days of the allotment of the bonus shares a return stating the number and nominal amount of bonus shares issued together with the names and addresses of the allottees and a copy of the resolution authorising issue of such shares (Sec. 75).
SEBI (ICDR) Regulations, 2009:
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Condition for Bonus Issue Subject to the provisions of the Companies Act, 1956, a listed company may issue bonus shares to its members if:
It is authorized by its articles of association for issue of bonus shares, and capitalization of reserves;
It has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;
It 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 and bonus;
The partly paid shares, if any outstanding on the date of allotment, are made fully paid up.
Restriction on Bonus Issue:
(1) A company cannot make a bonus issue of equity shares if it has outstanding fully or partly convertible debt instruments at the time of making the bonus issue, unless it has made reservation of equity shares of the same class in favor of the holders of such outstanding convertible debt instruments in proportion to the convertible part thereof.
(2) The equity shares reserved for the holders of fully or partly convertible debt instruments shall be issued at the time of conversion of such convertible debt instruments on the same terms or same proportion on which the bonus shares were issued.
Bonus Shares only against Reserves:
(1) The bonus issue shall be made out of free reserves built out of the genuine profits or securities premium collected in cash only.
(2) Reserves created by revaluation of fixed assets shall not be capitalized for the purpose of issuing bonus shares.
(3) The bonus share shall not be issued in lieu of dividend.
Completion of Bonus Issue:
(1) A company announcing a bonus issue after the approval of its board of directors and not requiring shareholders’ approval for capitalization of profits or reserves for making the bonus issue, shall implement the bonus issue within 15 days from the date of approval of the issue by its Board of Directors.
(2) Where the company is required to seek shareholders’ approval for capitalization of profits or reserves for making the bonus issue, the bonus issue shall be implemented within two months from the date of the meeting of its Board of Directors wherein the decision to announce the bonus issue was taken subject to shareholders’ approval. Once the decision to make a bonus issue is announced, the issue cannot be withdrawn.