Bonus shares are a strategic way for companies to reward shareholders without dipping into cash reserves. In India, issuing bonus shares is governed by the Companies Act, 2013, along with guidance from SEBI regulations (for listed companies).

These shares are issued out of free reserves, securities premium, or capital redemption reserves, without any consideration from shareholders.

Let’s explore the legal process in detail, along with the key sections and provisions of the Companies Act, 2013.

What Are Bonus Shares?

Bonus shares are additional shares given to existing shareholders without any additional cost, based on the number of shares already owned. For example, a 1:1 bonus issue means that for every 1 share held, 1 additional share is issued.

Legal Framework Governing Bonus Shares

The issue of bonus shares in India is primarily governed by:

• Section 63 of the Companies Act, 2013
• Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 – for listed companies

Section 63 of the Companies Act, 2013 – In a Nutshell

Section 63 lays down the provisions for issuance of bonus shares:

“A company may issue fully paid-up bonus shares to its members, out of—
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account…”

But not out of:

• Revaluation reserve
• Unrealized profits
• Reserves created by revaluation of assets

Conditions for Issuance of Bonus Shares

Before issuing bonus shares, a company must ensure the following:

• Authorization in Articles of Association (AOA):
  The AOA must authorize the company to issue bonus shares. If not, the AOA must be amended first.

• No Default:
  The company should not have defaulted in:

  • Payment of interest or principal in respect of fixed deposits or debt securities
  • Payment of statutory dues of employees (like PF, gratuity, bonus, etc.)

• Fully Paid Shares:
  Bonus shares can only be issued to shareholders whose existing shares are fully paid-up.

Step-by-Step Legal Process for Issuing Bonus Shares

- Check Articles of Association (AOA)

Verify whether the AOA allows bonus issuance. If not, call an Extraordinary General Meeting (EGM) to alter the AOA under Section 14 of the Act.

Hold a Board Meeting

Call a Board Meeting by giving notice to all directors under Section 173 and Secretarial Standard-1.

- Board Agenda:

• Approve bonus issue
• Fix ratio (e.g., 1:2)
• Fix record date
• Call General Meeting (if shareholders' approval is needed)

Shareholder Approval (If Required)

For private companies, if Articles require shareholders’ approval, convene a General Meeting under Section 96/100 and pass an Ordinary Resolution or Special Resolution depending on the AOA.

File ROC Forms

File the following forms with the Registrar of Companies (ROC):

• MGT-7A / MGT-7: Annual Return if applicable
• MGT-14: If a Special Resolution is passed (within 30 days)
• PAS-3: Return of allotment (within 30 days of allotment)

Issue of Bonus Shares

The company issues bonus shares by crediting the respective number of shares to shareholders’ Demat accounts or issuing share certificates (in case of physical shares).

Update Registers and Records

• Update Register of Members under Section 88
• Update Minutes Book and Statutory Registers

For Listed Companies

Listed companies must also follow:

• SEBI (ICDR) Regulations, 2018
• SEBI (LODR) Regulations, 2015
• Stock exchange notifications
• Disclose the bonus issue to stock exchanges within 24 hours of Board Meeting

Important Timelines to Note

Tax Implications of Bonus Shares

• For Shareholders: Bonus shares are not taxable at the time of receipt.
• Capital Gains Tax: Applies only when these bonus shares are sold.
• Cost of Acquisition: Considered zero for bonus shares.
• Holding Period: Starts from the date of allotment of bonus shares.

FAQs: Bonus Shares Made Simple

- Can a company issue bonus shares from revaluation reserves?

No. As per Section 63(2), bonus shares cannot be issued from revaluation reserves.

- Is shareholder approval mandatory for issuing bonus shares?

Not always. If the Articles of Association empower the Board to issue bonus shares, shareholder approval may not be needed. But many companies still seek shareholder approval to ensure transparency.

- Can bonus shares be issued partially paid?

No. Only fully paid-up bonus shares can be issued as per Section 63(1).

- What is the impact on the share price after a bonus issue?

After a bonus issue, the share price generally falls in proportion to the bonus ratio, but the overall value of the shareholder’s holdings remains the same.

- Are bonus shares the same as dividends?

Not exactly. Dividends are paid in cash, while bonus shares are issued in the form of additional shares, retaining capital within the business.

- Can private limited companies issue bonus shares?

Yes! Both private and public companies can issue bonus shares, subject to compliance with Section 63 and their Articles of Association.

- Are ROC filings mandatory for bonus issues?

Yes. Forms like MGT-14 (if resolution passed) and PAS-3 (return of allotment) are mandatory filings.

Inference

Issuing bonus shares is not just a generous gesture; it reflects a company’s financial strength and commitment to long-term value creation. Under the Companies Act, 2013, the process is well-regulated to protect shareholders and maintain corporate discipline. Compliance with Section 63, filing obligations, and transparency in corporate action ensure that the bonus issue aligns with both the law and the interests of shareholders.