BONUS ISSUE – An Opportunity to Earn more
The literal meaning of “Bonus” is “anything given to any person in addition to the customary”. Therefore, the Bonus issue of Shares means issue of shares to the existing shareholders, in proportion to their shareholding, out of free reserves available with the Company as a reward to their investment in the Company. It’s a corporate action recommended by the Board of Directors via converting the surplus funds (accumulated undistributed funds) available with the Company into share capital by issuing additional shares to the existing shareholders in proportion to their holding. In accounting terminology, it is popularly known as capitalisation of profits wherein share capital is increased on one hand and the reserves and surplus account is reduced on the other, resulting increase in number of shares without changing the overall percentage holding of members.
Hence, Bonus issue is a weapon in the hands of the Company used for self defence to raise its capital and at the same time to distribute its profits without any inflow/outflow of cash/ assets. Further there may be so many reason behind Issue of Bonus Share, lets check-out one by one.
REASON FOR ISSUE OF BONUS SHARES
- Adequate Free Reserves: Whenever a Company feels that it has surplus funds in its reserves and surplus, instead of declaring dividend, it may be distributed as Bonus shares among the existing shareholders of the Company. By doing this the Company protect the outflow of cash in form of dividend and dividend distribution tax.
- Capitalisation of Profits: Bonus issue is capitalisation of surplus funds which was not distributed as dividend by the Company to meet its business requirements. With passage of time, when this surplus is in abundant, the Board may decide to convert this surplus into the capital of the Company.
- Goodwill: Bonus issue of Shares signifies the Good Health of the Company. It signify that Company is stable enough to meet its business/ investors requirements, resulting in additional demand for their shares in the market.
- No Dilution of stake: Only the existing shareholders are entitled to bonus shares, resulting in no threat of dilution of stake of shareholders with increase in number of shares.
- Liquidity to investment: Post bonus issue, the demand for the shares rises, and with increase in number of shares, the investment in the Company becomes readily available and easy to be disposed of.
- No cash inflow: Bonus issue is only conversion of reserves into share capital. There is no inflow of cash, as they are for consideration other than cash i.e. the belief and support received from the investors.
- No Change in assets: There is no change in total assets of the Company. Neither cash/assets is received unlike normal issue nor cash is paid out unlike distribution of profit by way of dividend.
The provision of Section 63 read with Rule 14 of Chapter IV of The Companies (Share Capital and Debentures) Rule, 2014 deals with Issue of Bonus Shares.
SOURCE OF ISSUE OF BONUS SHARES
A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of:
- Free reserve
- Securities Premium
- Capital redemption reserves
However, capitalisation of revaluation reserves by way of issue of bonus shares are strictly prohibited
PRE-CONDITIONS FOR ISSUE OF BONUS SHARES
- Authorisation by Articles: The Company must have authorisation under the Article of Association, else the Board of Director would be first required to amend the AOA for issue of Bonus Shares.
- Recommendation by Board: The Board of Director must ensure the compliances of all the laws, because once the Bonus Shares would be recommended by the Directors, it can’t be withdrawn.
- Authorisation in General Meeting: The recommended bonus issue shall be authorised by the members in general meeting by way of Special Resolution (consent of atleast 75% of total persons present).
- No Default regarding Payment: The Company should not have any default regarding payment of:
- Principal / interest on Fixed Deposits
- Principal/ interest on Debt Securities
- Statutory dues of employees such as ESI, Provident Fund, Gratuity and Bonus etc.
- Partly – Paid up shares: All partly paid up shares, if any, should be made fully paid up before the date of allotment of bonus issue.
- In lieu of Dividend: Bonus shares cannot be made in lieu of dividend. In other words, dividend cannot be paid in kind by way of bonus shares.
PROCEDURE FOR BONUS ISSUE OF SHARES
- Conduct Board meeting: The Board meeting shall be convene to discuss the Agenda of issue of Bonus Shares and thereafter discussion shall be carried out for convening of General Meeting (EGM or AGM). The Board meeting has to be convened as per Secretarial Standards -1. Notice and agenda to be circulated at least 7 days before the meeting. However, in case the period of intimation is less than 7 days, approval for shorter notice is to be obtained.
- Issue notice for General Meeting: The notice shall be issued to the members by giving 21 days clear notice. However, General Meeting can also be conducted at a shorter notice by taking approval of more than 95% of shareholders entitled to vote.
- Convene and hold General Meeting: Convene General meeting as per provision of Secretarial Standard. Take necessary approval from Members by passing Special Resolution (consent of atleast 75% of total persons present).
- File form MGT-14: Once the Special Resolution is passed at the general meeting, the Company would be required to file MGT-14 with Registrar of Companies (ROC) within a period of 30 days from the date of passing of special resolution at General Meeting with the following attachments and along with the fee as prescribed under the Companies (Registration Offices and Fee) Rules,
- Certified True Copy of Notice of General Meeting along with explanatory statement;
- Certified True Copy of Resolution passed at the General Meeting.
- Delay beyond 30 days will attract additional fees and beyond 270 days will attract compounding of offence.
- Convene Board Meeting for Allotment: Convene another Board meeting for allotment of bonus shares and issue of share certificate in regard to the said allotment.
- File for PAS-3: The Company would be required to file PAS-3 with Registrar of Companies (ROC) within a period of 30 days from the date of passing of special resolution at General Meeting with the following attachments and along with the fee as prescribed under the Companies (Registration Offices and Fee) Rules,
- List of Allottes;
- Certified True Copy of Resolution passed at the Board Meeting.