What is Bonus Issue?
A bonus issue (also known as capitalization issue or stock dividend) is the issue of additional shares to existing shareholders free of cost, in proportion to their existing holdings. The bonus shares are issued by capitalizing the company's free reserves or securities premium account. No cash consideration is received from shareholders.
Key Features of Bonus Issue
- • Free shares issued to existing shareholders
- • Proportionate to existing shareholding
- • No payment required from shareholders
- • Funded from free reserves or securities premium
- • Total net worth of company remains unchanged
- • Face value per share remains same
- • Market price adjusts proportionately post-issue
Why Companies Issue Bonus Shares
Bring Market Price to Accessible Range
Reduces per-share price making shares affordable to retail investors.
Capitalize Reserves
Convert accumulated reserves into share capital, reflecting permanent capital.
Improve Liquidity
More shares in circulation improves trading liquidity in the market.
Signal Confidence
Signals management confidence in future earnings and growth prospects.
Legal Framework
Companies Act 2013 - Section 63
Section 63 provides that a company may issue fully paid-up bonus shares to its members from:
- • Its free reserves
- • The securities premium account
- • The capital redemption reserve account
Conditions for Bonus Issue
- • Must be authorized by articles of association
- • Must not be in lieu of dividend
- • No default in payment of interest/principal on fixed deposits or debt securities
- • No default in compliance with section 71 (debentures)
- • Must be implemented within 15 days of approval (for unlisted)
- • Listed companies must comply with SEBI ICDR Regulations
SEBI ICDR Regulations (for Listed Companies)
SEBI prescribes additional conditions for listed companies:
- • Bonus issue out of free reserves built out of genuine profits
- • Residual reserves after bonus must be at least 40% of increased paid-up capital
- • 30% of average amount of equity shares (post-bonus) must be listed
- • No complaint pending from shareholders regarding transfer
- • No failure in listing of specified securities
Sources for Bonus Issue
Permitted Sources
Free Reserves
Reserves built out of genuine profits and not specifically earmarked. Includes general reserve, retained earnings, surplus in P&L account.
Securities Premium Account
Premium collected on issue of shares. Can be fully utilized for bonus issue.
Capital Redemption Reserve
Created when redeemable preference shares are redeemed out of profits. Can be used for bonus issue of fully paid-up shares.
Prohibited Sources
- • Revaluation reserve (created by revaluation of assets)
- • Amalgamation reserve (unless it represents genuine profits)
- • Reserves created without accrual of cash
- • Any reserve not built from genuine profits
SEBI Additional Requirement - Residual Reserves
For listed companies, after bonus issue, the residual reserves must be at least 40% of the increased paid-up capital for 3 years immediately after the bonus issue.
Bonus Issue Process
Step 1: Check Eligibility
- • Verify sufficient free reserves/securities premium
- • Check no defaults exist
- • Verify articles authorization
- • Ensure compliance with SEBI conditions (listed companies)
Step 2: Board Meeting
- • Approve bonus issue in principle
- • Determine bonus ratio
- • Fix record date
- • Fix date for general meeting
- • Approve draft notice
Step 3: Stock Exchange Intimation (Listed Companies)
- • Intimate stock exchanges of board meeting
- • File outcome of board meeting
- • Obtain in-principle approval
Step 4: General Meeting
- • Pass ordinary resolution (special resolution if articles require)
- • Approve amendment to MOA for capital clause
- • Shareholder approval for bonus ratio
Step 5: Record Date
- • Determine shareholders entitled to bonus shares
- • At least 7 days notice for record date (SEBI)
- • Close transfer books if required
Step 6: Allotment
- • Allot shares to eligible shareholders
- • Credit to demat accounts (listed companies)
- • Issue share certificates (unlisted companies)
- • Within 15 days of approval for unlisted companies
Step 7: Post-Issue Compliance
- • File PAS-3 with ROC within 30 days
- • File SH-7 for increase in authorized capital (if required)
- • File MGT-14 for special resolution (if applicable)
- • Update register of members
- • Listing application to stock exchanges (listed companies)
SEBI Guidelines for Listed Companies
Additional Conditions
- • Bonus issue must be made out of free reserves built from genuine profits
- • Reserves created by revaluation of assets not permitted
- • Residual reserves must be at least 40% of increased paid-up capital
- • 30% of average of pre-bonus capital must have been listed for 3 years
- • No complaint regarding transfer of shares pending
- • No default in depositing PF, gratuity, bonus, minimum wages
Timeline Requirements
- • Implementation within 30 days of board approval (if no shareholder approval required)
- • Within 3 months if shareholder approval required
- • Within 15 days of record date for crediting shares
Disclosure Requirements
- • Intimation to stock exchanges at least 7 days before record date
- • Post-bonus advertisement in newspapers
- • Compliance report to stock exchanges
Accounting Treatment
From Free Reserves/General Reserve
Dr. General Reserve / Free Reserves
Cr. Equity Share Capital Account
From Securities Premium
Dr. Securities Premium Account
Cr. Equity Share Capital Account
From Capital Redemption Reserve
Dr. Capital Redemption Reserve
Cr. Equity Share Capital Account
Note on Reserves
The bonus issue essentially converts reserves into share capital. Total shareholders' equity remains unchanged - only the composition changes between reserves and capital.
Example
Company with:
- • Share Capital: ₹100 lakhs (10 lakh shares of ₹10 each)
- • General Reserve: ₹150 lakhs
- • Total Equity: ₹250 lakhs
After 1:1 bonus issue:
- • Share Capital: ₹200 lakhs (20 lakh shares of ₹10 each)
- • General Reserve: ₹50 lakhs
- • Total Equity: ₹250 lakhs (unchanged)
Tax Implications
For the Company
- • No tax implications on issue of bonus shares
- • Only stamp duty on increased share capital
- • ROC filing fees for forms
For Shareholders
- • No tax on receipt of bonus shares - Bonus shares are not taxable as income
- • Cost of acquisition of bonus shares is considered NIL
- • Period of holding for bonus shares starts from date of allotment
- • On sale of bonus shares: Capital gains = Sale proceeds - NIL (cost)
Cost Allocation (Section 55)
When original and bonus shares are sold:
- • Cost of original shares: Original cost of acquisition
- • Cost of bonus shares: NIL
- • Period of holding for original shares: From original acquisition
- • Period of holding for bonus shares: From date of bonus allotment
Example of Tax Calculation
• Original: 100 shares purchased @ ₹100 = ₹10,000
• Bonus: 100 shares received (1:1)
• Sold all 200 shares @ ₹80
• Capital gains on original 100 shares = (100 × ₹80) - ₹10,000 = -₹2,000 (loss)
• Capital gains on bonus 100 shares = (100 × ₹80) - NIL = ₹8,000
Benefits of Bonus Issue
To the Company
- • Converts reserves into permanent capital
- • Improves creditworthiness
- • No cash outflow
- • Signals financial strength
- • Increases equity base
To Shareholders
- • Receive additional shares free
- • Lower entry price for new investors
- • Improved liquidity
- • Potential future dividends on more shares
- • No immediate tax liability
Limitations and Restrictions
Cannot Issue Bonus If:
- • Company has outstanding default in debt payments
- • Articles do not permit bonus issue
- • Insufficient free reserves/securities premium
- • Residual reserves would fall below 40% of capital (SEBI)
- • Partially paid-up shares exist
- • In lieu of dividend
Important Considerations
- • Bonus issue does not increase net worth
- • EPS gets diluted proportionately
- • Market price adjusts downward
- • Book value per share remains same
- • Total shareholder value unchanged immediately