ISSUE OF BONUS

SHARES

B MONIKA RAO
2015PGP017

Table of Contents
Bonus Shares

Circumstances for issuing Bonus Shares 2

Terms and Conditions for issue of bonus
shares
...3
Conditions for Bonus
Issue
...3
Restriction on Bonus
issue
.3
Bonus shares only against reserves, etc. if capitalized in cash.3
Completion of bonus issue...3
Guidelines for Bonus Issue.4
Compliance Check List and generation of various Documents and Registers during Pre and Post
Issue..4
Compliance Check List5
Pre Issue work for the Issue of Bonus Shares...5
Post Issue of Bonus Shares.5
Consequences of issue of Bonus Shares...5
List of companies which issues Bonus Shares in 2015-16..6
References
.6

Bonus Shares
A bonus share is an extra free share given to current shareholders in a company without any
additional cost based upon the number of shares that the shareholder already owns. The issue of
bonus shares increases the total number of shares issued and owned, it does not increase the value of
the company, although the total number of issued shares increases, the ratio of number of shares held
by each shareholder remains constant. A bonus issue (or scrip issue) is a stock split in which a
company issues new shares without charge in order to bring its issued capital in line with its
employed capital (the increased capital available to the company after profits). This usually happens
after a company has made profits, thus increasing its employed capital. Therefore, a bonus issue can
be seen as an alternative to dividends. Unlike a rights issue, a bonus issue does not risk diluting your
investment. Although the earnings per share of the stock will drop in proportion to the new issue, this
is compensated by the fact that you will own more shares. Therefore the value of your investment
should remain the same although the price will adjust accordingly. The whole idea behind the issue
of Bonus shares is to bring the Nominal share Capital in line with the true excess of assets over
liabilities Companies issue shares in lieu of consideration. The consideration may be either in the
form of cash or kind. Bonus shares are issued by conversion of the reserves and surplus of the
company into shares. Bonus shares can be issued only by companies which have accumulated large
free reserves i.e. reserves not set apart for any specific purpose and which can be distributed as
dividend. However, bonus shares can be issued out of balance in the share premium account.

Circumstances for issuing Bonus Shares

If a company wants to avoid showing large amounts of distributable income on the balance sheet
and ploughing back its profits to capital, which it has to distribute otherwise, it can issue bonus
shares. Dividend payment is not obligatory for the company but if the company has huge
accumulated profits investors may demand for dividend. Dividend payment entails cash outflow
also dividends must be kept stable and should increase gradually. Hence in case of heavy profits
to avoid heavy dividend payments company can convert its accumulated profits into share capital
by issuing bonus shares. This also perk up market image of the company. If a company can earn
more returns than market rate of return, which investors will earn if dividends are distributed to
them, then it is advisable to retain the profits by the company itself instead of paying heavy
dividends, which will enhance the national income of the country.
When the companies accumulated huge profits and reserves, and it desires to capitalize these
profits the companies will go for issuing bonus shares. The other reason is high declaration of
cash dividends is prohibited by the Government, so the companies will issue the bonus share,
when the higher rate of dividend declared, in the future years also the shareholder will expect the
same rate of dividend. When the company cannot have the sufficient cash balance to declare
dividends, the company will go for bonus issue. To avoid adverse effects on working capital the
companies issue bonus shares.
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The objectives of issuing bonus shares is to bring the amount of issued and paid up capital in line
with the capital employed so as to depict more realistic earning capacity of the company, to bring
down the abnormally high rate of dividend on its capital to avoid labor problems i.e. demand for
higher wages, to pay bonus to shareholders of the company without affecting its liquidity and
earning capacity of the firm.

Terms & Conditions

Conditions for bonus issue
[2]

Subject to the provisions of the Companies Act, 1956 or any other applicable law for the time
being in force, a listed issuer may issue bonus shares to its members if:
(a) It is authorized by its articles of association for issue of bonus shares, capitalization of
reserves, etc.: Provided that if there is no such provision in the articles of association, the issuer
shall pass a resolution at its general body meeting making provisions in the articles of
associations for capitalization of reserve.
(b) It has not defaulted in payment of interest or principal in respect of fixed deposits or debt
securities issued by it.
(c) 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; (d)
the partly paid shares, if any outstanding on the date of allotment, are made fully paid up.
Restriction on bonus issue
(1) No issuer shall 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, etc. if capitalized in cash
(1) The bonus issue shall be made out of free reserves built out of the genuine profits or
securities premium collected in cash only and reserves created by revaluation of fixed assets
shall not be capitalized for the purpose of issuing bonus shares.
(2) Without prejudice to the provisions of sub-regulation (1), the bonus share shall not be issued
in lieu of dividend.
Completion of bonus issue
(1) An issuer, 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 fifteen days from the date of approval of the issue
by its board of directors: Provided that where the issuer is required to seek shareholders
3

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.
(2) Once the decision to make a bonus issue is announced, the issue cannot be withdrawn.

Guidelines for Bonus Issue[3]

1) A listed company proposing to issue bonus shares shall comply with the following:

2)
3)
4)
5)
6)

7)

a) No company shall, pending conversion of FCDs/PCDs, issue any shares by way of

bonus unless similar benefit is extended to the holders of such FCDs/PCDs, through
reservation of shares in proportion to such convertible part of FCDs or PCDs.
b) The shares so reserved may be issued at the time of conversion(s) of such debentures on
the same terms on which the bonus issues were made.
The bonus issue shall be made out of free reserves built out of the genuine profits or share
premium collected in cash only.
Reserves created by revaluation of fixed assets are not capitalized.
The declaration of bonus issue, in lieu of dividend, is not made.
The bonus issue is not made unless the partly-paid shares, if any existing, are made fully
paid-up.
The Company
a) Has not defaulted in payment of interest or principal in respect of fixed deposits and
interest on existing debentures or principal on redemption thereof.
b) 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, bonus
etc.
582(A company which announces bonus issue after the approval of board of directors and
does not require shareholders approval for capitalization of profits or reserves for making
bonus issue as per the Articles of Association, shall implement bonus issue within fifteen
days from the date of approval of the issue by the board of directors of the company and shall
not have the option of changing the decision).

Compliance check list and generation of various documents and registers

during pre and post issue
Once the professional understands the requirements of Section 63 as stated above, he should then
have the following Compliance Check List which will enable him to prepare the required
documents and registers during Pre and Post issue of bonus shares.
Compliance Check List
1) Source out of which the bonus issue is to be made.
a) Current Profit || Value
b) Current Reserves || Value
c) Current Securities premium account | Value
2) Quantum of Issue
a) No of shares
b) Nominal value per share
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c) Total
3) Intended date of Board meeting
a) For alteration of Articles subject to the approval of the shareholders(if required)
b) For recommending the issue
c) Convening the EGM
4) Intended date of EGM for considering the alteration of article if required and/or approval of
the bonus issue
5) Intended date of board meeting for allotment of bonus shares
Pre Issue work for the Issue of Bonus Shares
Once the professional prepares the compliance check list, he could then proceed to generate the
following documents during the pre-issue of bonus shares
a) Draft Notice and the draft minutes of the Board Meeting for considering the following:
I.
Alteration of Articles (only when required)
II.
Recommending the bonus issue
III.
Convening the EGM
1. For alteration of Articles which do not provide for capitalization of reserves only when
required
2. Approving the Bonus Issue recommended by the Board
b) Draft EGM Notice, explanatory Statement and the Minutes for considering the following
special business
I.
For alteration of Articles (which do not provide for capitalization of reserves)
II.
Approving the bonus issue recommended by the Board
c) Draft Notice and Minutes of the Board Meeting for
I.
Allotment of Bonus shares
d) Filing of Form No. 7.14 with the Registrar of Companies for registering the special
resolution (only when the Articles of Association is amended for making provision for
capitalization of profits)
Post issue of Bonus Shares
a) Preparation and Issue of Share Certificates in the Format No. 4.1
b) Making entries in the Register of Members in Format No. 7.1
c) Making entries in the Register of Directors and Key Management Personnel and their
Shareholdings as per Section 170
d) Filing Form No. 3.3 with regard to Allotment of Bonus shares.
Consequences of issue of Bonus Shares
Only fully paid-up shares are eligible for bonus. [4] Market observers believe that bonus shares
are being given to improve liquidity and arrest the free fall in stock prices. The share price of the
company gets adjusted according to the bonus ratio. For instance, if the share price of the
company is Rs 200 before the bonus and it issues bonus shares in the 1:1 ratio, the post-bonus
price would be Rs 100. The total market value of the company would, however, remain the same.

List of companies which issued Bonus shares in 2015-16 [5]:

COMPANY
Filtra Consult
Visagar Polytex
Atahrv Ent
Tide Water Oil
Rama Steel Tube
Assoc Alcohol
Ideal Optics
Mindtree
ABans Enterpris
Vegetable Prod
Control Print
Kothari Product
Allcargo Log
Marico
Venkys(India)
Marathon Nextgen
eClerx Services
Mangal Credit
Fairdeal Fila
Monarch Health
Atreya Petro
Ruby Mills
Dhabriya Polywood
Vinaditya Trad
Tiger Logistics

Bonus Ratio
3:2
1:3
1:1
1:1
4:1
1:1
2:5
1:1
7:1
9:5
1:2
1:2
1:1
1:1
1:2
1:2
1:3
5:1
1:10
3:4
1:3
1:1
1:4
47:1
3:2

Announcement
22-02-2016
10-02-2016
10-02-2016
28-01-2016
27-01-2016
22-01-2016
29-01-2016
18-01-2016
07-01-2016
26-08-2015
17-11-2015
10-11-2015
06-11-2015
04-11-2015
14-09-2015
03-11-2015
02-11-2015
05-11-2015
13-08-2015
13-10-2015
31-08-2015
31-08-2015
01-09-2015
07-09-2015
01-09-2015

DATE
Record
08-04-2016
02-04-2016
19-03-2016
17-03-2016
15-03-2016
11-03-2016
12-03-2016
10-03-2016
04-03-2016
22-02-2016
12-01-2016
06-01-2016
31-12-2015
24-12-2015
22-12-2015
22-12-2015
18-12-2015
19-12-2015
31-10-2015
30-10-2015
26-10-2015
24-10-2015
23-10-2015
16-10-2015
16-10-2015

Ex-Bonus
06-04-2016
30-03-2016
17-03-2016
16-03-2016
14-03-2016
10-03-2016
10-03-2016
09-03-2016
03-03-2016
18-02-2016
11-01-2016
05-01-2016
30-12-2015
22-12-2015
21-12-2015
21-12-2015
17-12-2015
17-12-2015
29-10-2015
29-10-2015
23-10-2015
21-10-2015
21-10-2015
15-10-205
15-10-2015

Table 1

References
[1]http://corporatelawreporter.com/2014/03/26/issue-bonus-shares-companiesact-2013/
[2] http://www.sebi.gov.in/guide/DipGuidelines2009.pdf
[3] http://www.divest.nic.in/Sebidip/chap9.pdf
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[4]http://taxguru.in/company-law/impact-companies-act-2013-rules-bonus-issueshares.html
[5] http://www.moneycontrol.com/stocks/marketinfo/bonus/