Bonus Shares: Legal Requirements and Compliance Standards

Provisions Related to Bonus Shares

Bonus shares are additional shares issued by a company to its existing shareholders free of cost, in proportion to their shareholding. These shares are issued from the company’s accumulated reserves or profits. The issue of bonus shares is governed by Section 63 of the Companies Act, 2013 and SEBI guidelines for listed companies.

Key Provisions for Issuing Bonus Shares

Authorization in Articles of Association (AOA)

The company must have a provision in its Articles of Association (AOA) permitting the issue of bonus shares. If such a provision is not present, the company must first amend its AOA by passing a special resolution.

Approval by Shareholders

The company must obtain approval from shareholders in a general meeting by passing an ordinary resolution. The board of directors makes the recommendation for issuing bonus shares.

Permissible Sources for Bonus Issue

Bonus shares can be issued from:

• Free Reserves: Profits retained by the company.
• Securities Premium Account: The extra amount received over the face value of shares.
• Capital Redemption Reserve: Created when preference shares are redeemed.

Note: Bonus shares cannot be issued from revaluation reserves.

No Default Condition

The company should not have defaulted in:

• Payment of principal or interest on debentures, loans, or deposits.
• Payment of statutory dues like Provident Fund (PF), Employee State Insurance (ESI), etc.

Fully Paid-Up Shares

Bonus shares must be issued only to holders of fully paid-up shares. If any partly paid-up shares exist, the company must first call for the pending amount to make them fully paid-up before issuing bonus shares.

Bonus Shares Not in Place of Dividends

Bonus shares cannot be issued as a substitute for cash dividends. The company must ensure a balanced approach between dividend payments and bonus issues.

SEBI Guidelines for Listed Companies

A listed company must comply with SEBI (Issue of Capital and Disclosure Requirements) Regulations. The company must announce the record date in advance for shareholders eligible to receive bonus shares.

No Reduction of Capital After Bonus Issue

After issuing bonus shares, the company cannot reduce its share capital for at least one year, except in specific circumstances approved by the authorities.