BONUS SHARES SECTION-63 OF COMPANIES ACT-2013 Part 1

Definition: Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company’s accumulated earnings which are not given out in the form of dividends, but are converted into free shares.

Bonus shares is actually a book keeping transaction (because no cash comes in hands), it capitalizes a part of reserves (retained earnings) to bring:

(1) Share capital more in line with the assets employed; and

(2) The high share price back to a more manageable amount, thus enhancing its market ability. Although the number of shares held by each shareholder increases, the value of the total shareholding (or the percentage of shareholding) remains the same as before the bonus issue. Also called scrip issue, bonus shares, or capitalization issue.

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 is already filled up with cash and wishes to capitalize some of its liquid assets.

Companies issue bonus shares to encourage retail participation and increase their equity base. When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared.

For example:- the company may give one bonus share for every five shares held. 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 under the Companies Act, 1956 dealing with Bonus Shares that Table A contains provision relating to capitalization of profits. Companies were following the norms prescribed by the Controller of Capital issues. Once SEBI came into existence and controller of Capital issues were abolished, 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.

Bonus issue can be made ONLY to EXISTING SHAREHOLDERS.

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:

A. Free reserves.

B. Securities Premium Account.

C. Capital Redemption Reserve Account. (CRR Account)

Source from which Bonus Shares can’t be issued:

A. No issue of bonus shares shall be made capitalizing reserves created by the revaluation of assets. (Company can’t issue Bonus Shares out of reserves create from revaluation of assets).

B. The Company shall not issue shares in lieu of Dividend.

Restrictions  on  withdrawal  of  Bonus  Issue

Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014 provides that the company which has once announced  the  decision  of  its  Board  recommending  a bonus  issue  shall  not  subsequently withdraw  the  same.

To be continued in Part 2