ISSUE OF BONUS SHARES

Introduction:
The undistributed profits, after the necessary provisions for taxation, are the property of the equity
shareholders and the same may be used by the company for distribution as dividends to them. But
the sound financial policy demands that some of the profits at least must be ploughed back into the
business. Thus when a company has accumulated substantial amount of past profits as might be
found in the credit of capital reserves, revenue or general reserve of profit and loss account; it is
desirable to bring the amount of issued share capital closer to the actual capital employed as
represented by the net assets (Assets – Liabilities) of the company. This would reflect the true
amount of capital invested by the shareholders in the company.

For example, the capital, which the shareholders have contributed for shares, is clearly visible since
this was contributed in cash. But the capital, which they have contributed in the form of accumulated
profits, remains unknown because this was not a direct contribution in cash.
In order to rectify these, accumulated profits in full or in part are capitalized, that is, accumulated
profits are converted into shares. Shares are distributed free of charge and therefore are known as
Bonus Shares, which are given to existing shareholders pro rata to their holdings. It may be added
the bonus shares may be issued to make up the existing partly paid shares as fully paid.

Objecive behind the Issue of Bonus Shares:

1. Company’s cash resources may not be sufficient to pay dividend in cash
2. Company wants to build up cash resources for expansion or for repayment of a liability.
3. Company may want to bring its paid up capital more in line with the capital resources employed in
the business.
4. It may be required to with a view to bringing down the rate of dividend though not the quantum of
dividend on the issued capital of the company.

SEBI GUIDELINES on the issue of bonus shares

There are no guidelines for issuing bonus shares by the private companies or unlisted public
companies has been issued by the SEBI (Disclosure and investor protection) Guidelines, 2000.
However, the listed public companies for issuing bonus shares to the shareholders must comply with
the guidelines issued by the SEBI (disclosure and Investor Protection) Guidelines, 2000.

The requirements of the guidelines of SEBI are given below:

a) Right of FCD/PCD holders: No company shall pending the conversion of FCDs/PCDs issue any
shares by way of bonus unless similar benefit is extended to the holders of FCDs/PCDs, through
reservation of shares in proportion to such convertible part of FCDs/PCDs. The shares so reserved
may be issued at the time of conversion of such debentures on the same terms on which the rights
or bonus issues were made.

b) Out of free reserves: the bonus issue shall be made out of free reserves built out of genuine profits
or share premium collected in cash only.
c) Revaluation of fixed assets: reserves created by revaluation of fixed assets should not be
capitalised. If assets are subsequently sold and the profits are realized, such profits could be utilised
for capitalization.

d) Bonus issue not to be in lieu of dividend: The declaration of bonus issue, in lieu of dividend, should
not be permitted.

e) Fully paid shares: Bonus issue shall not be made, unless the partly paid shares, if any, existing are
made fully paid up.
f) No default in respect of deposit/debentures: the company should not have defaulted in payment of
any interest or principal in respect its fixed deposits and interest on debentures or redemption of
debentures.

g) Statutory dues of the employees: the company should not be defaulted in payment of its statutory
dues to the employees such as contribution to PF, gratuity, bonus, minimum wages, workmen’s
compensation, retrenchment, payment to contract labour etc.

h) Implementation of proposal: The bonus issue shall be implemented within a period of 15 days
after the date of approval of the BoD; it does not require the shareholders’ approval for capitalization
of profits or reserves for making bonus issue as per the AoA of the company.
However, if the company is required to get the shareholders’ approval as per AoA of the company
for capitalization of profits or reserves, the bonus issue shall be implemented within 2 months from
the date of the meeting of the BoD.

i) Provision in the AoA: the AoA of the company should provide the provision for the capitalization
profits, i.e. it must authorize the bonus issue, if not, and steps should be taken to alter the AoA
suitably.

j) Authorised capital: consequent upon bonus issue if the subscribed or paid up capital of the
company exceed the authorised capital, then a resolution shall be passed by the company at its GM
for increasing its authorised capital to that extent.

k) Certificate: A certificate duly signed by the issuer company and countersigned by the statutory
auditor or the company secretary in practice to the effect that the provisions of the guidelines has
been complied with shall be forwarded to the SEBI.

Difference between Bonus Shares and Right Shares

• Bonus Issue: Bonus shares are additional free shares issued to the shareholder by the company.
Profitable Companies in India issue Bonus Shares. These are additional shares issues given the
shareholder without any cost to existing shareholders.
• Rights Issue: Rights issues are the shares issued by a company only to its existing shareholders
which will be cheaper than the current market price of that company share. In Rights Issue, some
costs are involved and the shareholders can either subscribe or unsubscribe.

Free reserves that can be used for issue of Bonus shares:

a) Surplus in profit and loss account.
b) General reserve.
c) Dividend equalization reserve.
d) Capital reserve arising from sale of fixed assets in cash.
e) Balance in debenture redemption reserve after redemption of debentures.
f) Capital redemption reserve account created at the time of redemption of redeemable preference
shares out of the profits.
g) Securities premium account collected in cash.

Reserves not available for issue of Bonus Shares:

a) Capital reserve arising due to revaluation of assets.
b) Securities premium arising on issue of shares on amalgamation or take over.
c) Investment allowance reserve/ Development allowance reserve before expiry of 4 years from the
date of creation.
d) Surplus arising from a change in the method of depreciation.
e) Balance in debenture redemption reserve account before redemption takes place.
Accounting treatment
a) For fully paid bonus shares

1) Capital Redemption Reserve A/c Dr

Securities Premium A/c Dr
Profit and Loss Account Dr
General reserve and other Free reserves A/c Dr
To Bonus to Shareholders A/c

2) Bonus to Shareholders A/c Dr

To Equity Share Capital A/c
To Securities Premium A/c

b) For bonus shares issued to make partly paid shares fully paid up

1) Profit and Loss Account Dr

General reserve and other Free reserves A/c Dr
To Bonus to Shareholders A/c

2) Share Final call A/c Dr.

To Share Capital A/c

3) Bonus to Shareholders A/c Dr

To Share final call A/c