Issue of Bonus Shares

Bonus shares are additional shares allotted to the current shareholders without receiving any additional cost from them, based upon the number of shares that a shareholder owns.

Bonus shares are issued under following circumstances:

• When a company has large reserves accumulated and it wants to capitalize it by issuing bonus shares.
• When value of fixed assets exceeds the amount of capital.
• When higher rate of dividend is not advisable due to risk of same demand in future by the shareholders and the company might not afford this demand.
• When there is a need for sharp rise in market price of equity shares.

# Types of Bonus Share

The bonus shares issued are of two types:

1.  Fully paid Bonus Shares

New shares are distributed free of cost in the proportion of share holdings.

2.  Partly paid Bonus Shares

Partly paid up shares are converted into fully paid shares without charging any amount from the shareholders.

# Sources of Bonus Share

A company can issue bonus shares to its shareholders out of following resources:

• Capital redemption reserve
• Security premium (realized in cash)
• Capital reserve (realized in cash)
• Profit and loss account
• General reserve
• Investment allowance reserve
• Sinking fund for redemption of debentures (only after redemption)
• Development rebate reserve.

A company cannot issue bonus share from the reserves created from reserves that are not realized in cash (like reserves made from revaluation of fixed assets). Also, company cannot issue bonus shares in lieu of dividend to be paid to the shareholders.

# Conditions for Issue of Bonus Share

A company has to fulfill following conditions to be eligible for issuing bonus shares:

• Issue of bonus share should be authorized by Articles of Association.
• Such issue should be recommended by board and authorized in general meeting.
• The company should not have defaulted in payment of interest or principle of any of its fixed deposits or debt securities.
• The company should not have defaulted in respect of payments to employees such as contribution to PF, gratuity, etc.
• The partly paid shares should be first converted to fully paid and then can a company issue new bonus shares.
• ISSUE OF BONUS SHARES ONCE ANNOUNCED CANNOT BE WITHDRAWN.

# Procedure of Issuing Bonus Share

Following procedure is followed to issue bonus shares to the shareholders:

1.  Board meeting is called for which notice is issued at least 7 days prior to the meeting.

2.  Board meeting is held and issue of bonus share is recommended along with the details related to the issue like number and proportion of shares to be offered, alteration of AOA to authorize issue if required, etc.

3.  Notice for general meeting is issued at least 21 days prior to the meeting.

4.  Issue of bonus share is authorized in the general meeting and special resolution is passed.

5.  Form MGT-14 is submitted to the Registrar of Companies to inform about the issue within 30 days of passing the resolution in general meeting. Special resolution for issue of shares is attached in the form.

6.  Issue notice to call board meeting at least 7 days prior to the date of board meeting.

7.  In board meeting, ordinary resolution is passed for allotment of bonus shares.

8.  E-form PAS-3 is filed within 30 days of passing board resolution for allotment of bonus shares. Special resolution for issue of shares, ordinary resolution for allotment of shares and list of allottees with all the necessary details are attached with the form.

9.  Bonus share certificates are issued to the shareholders within 2 months from the date of allotment of shares.

# Advantages of Issuing Bonus Share

Following are the advantages of issuing bonus shares to the existing shareholders:

• Inexpensive:Issue of bonus shares is an inexpensive way of raising capital for the company.
• More Marketable:Issue of Bonus shares increases the market price of the shares and thus, increases the profit to the shareholders.
• Increases the reputation:Issue of bonus share indicates to the investors that the company has good prospects, thus increasing the reputation of company in the market.