Information About Bonus Shares

A Public Limited Company Collects funds from shareholders by way of the issue of equity shares or preference shares. Hence the shareholders expect a high return on their investment. The company can do the same either by the issue of bonus shares or by declaring cash dividends on equity shares of the company. 

Cash dividends are actual transactions and pay-out involved in it. However, in the case of bonus shares, there is no pay-out involved in it, and it is just a book entry where Reserves are capitalized. 

Due to a shortage of funds, Companies are not able to pay dividends in cash. In such a situation, the Companies Issue Bonus Shares to existing shareholders rather than paying the Dividend in cash to the shareholders. 

Bonus shares are accumulated profits that a company distributes to the existing shareholders free of cost. There are no additional costs involved in it, and the Bonus shares are given based on the current holding of shareholders.

PROS FOR ISSUING BONUS SHARE

• Bonus shares provide additional income to shareholders and shareholders are not needed to pay any tax on receiving bonus shares.
• Due to the increase in the number of shares of the company, per share has been reduced. It becomes easy for the small investor to buy shares in the company.
• Bonus shares increase the equity base of the company, Price making it look like an attractive option for retail participation.
• The issue of bonus shares attracts small investors; hence it offers more liquidity to share the company. 
• The issue of bonus offers the company to save money and reinvest it back into the business of the company for growth and expansion.
• Issue of bonus shares means capitalization of profits of the company and capitalization of profits always increases the creditworthiness of the company to borrow funds.

CONS FOR ISSUING BONUS SHARE 

• Issuing bonus shares is more expensive than declaring a dividend. It uses the company’s capital reserve.
• The company does not receive any income from the release of bonus shares.
• The procedure for the issue of bonus shares is lengthy as it requires various approval.
• It will promote speculative dealings in the share of the company.
• The rate of dividends will decline sharply in the future, which may confuse the minds of the investors.

APPLICABLE LEGISLATION:

The key legislation regulating the concept of Issue of Bonus shares are as follows:

Section 63 of the Companies Act, 2013

Rule 14 of The Companies (Share Capital and Debentures) Rules, 2014 

Chapter XI of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

PREREQUISITE FOR ISSUE OF BONUS SHARE:

• It is authorized by its articles, if not then alter AOA as per section 14 of the Companies Act, 2013.
• The authorized share capital of the company is sufficient for the issuance of bonus shares. If not, increase the authorized share capital of the company as per section 61 of the Companies Act, 2013, and alter the Memorandum of Association as per section 13 of the Act.
• Bonus share has been issued on the recommendation of the Board and has been authorized in the general meeting of the company.
• The company has not defaulted in repayment of the principal amount or payment of interest on fixed deposits or debt securities issued by it.
• The company has not defaulted in respect of the payment of statutory dues of the employees i.e contribution to provident fund, gratuity.
• if any partly paid-up shares outstanding on the date of allotment, are made fully paid-up.
• Bonus shares shall not be issued instead of dividends.
• The Company shall authorize the issue of bonus shares in its General Meeting.

FUNDING OPTIONS FOR BONUS SHARES

• The Free reserve: It is built out of the genuine profit of the Company.
• The Securities premium Account: The extra money received by the company on the issue of shares. In the case of Listed Companies, the realizable cash portion of the securities premium account, and for Unlisted companies whether in cash or others.
• The Capital Redemption Reserve Account: It may be created from the redemption of preference shares or Buy Back of shares.

SOURCES FROM WHICH BONUS SHARES CAN NOT BE ISSUED

• Bonus shares cannot be issued by capitalizing reserves created by the revaluation of assets.
• Bonus shares cannot be issued instead of dividends.

BONUS SHARE CALCULATION

Bonus shares are issued to existing shareholders as per their stake in the company at the time of issue of the bonus share.

Illustration:

Q.ABC Ltd declared a bonus issue, 1 share for every 5 shares held

The issued capital of the company – Rs.50,00,000(1,00,000 equity shares of Rs. 50 each)

Reserves-Rs.30,00,000

Ans. No bonus shares are to be issued 20,000 (1,00,000/5)

         Total number of shares after bonus issue 1,20,000 (1,00,000+20,000)

Total cost of bonus shares – 10,00,000 (20,000*50)

Balance of reserve after issue of bonus share 20,00,000 (30,00,000 – 10,00,000)

PROCEDURE FOR ISSUE OF BONUS SHARE:

1. Check whether the AOA authorizes the issue of bonus shares. If not, then alter the AOA of the company by passing the Special Resolution and filing form MGT-14 with ROC.
2. Check whether the Bonus issue increases the authorized share capital of the company. If so, make necessary steps for the increase in authorized capital as per section 63 of the Act alterations in the Memorandum of Association by passing a special Resolution.
3. Convene and hold the board Meeting after giving 7 days’ notice to all directors of the company and pass the following resolution:

• To recommend the bonus issue of share
• To decide the ratio of shares offered to exist, shareholders of the company,
• Fix the time, date, and location of General Meetings of the company for seeking the consent of members for issuance of Bonus shares.

1. Issuing the Notice of General Meetings at least 21 clear days before EGM to all the directors, members, and auditors of the Company along with the Explanatory for considering issuing bonus stock is a unique business that requires specific attention..
2. Convene and hold EGM for passing of the Ordinary Resolution for approval of the members for the issue of bonus shares.
3. Again, Convene and hold the board Meeting after giving 7 days’ notice to all directors of the company for allotment of shares.
4. Company shall file Return of allotment with ROC in Form PAS-3 along with fee as specified in Companies (Registration of Offices and Fees), Rules 2014 within 30 days of passing of Board Resolution for allotment of shares

Attachment to e-Form PAS-3

• A certified true copy of the Ordinary Resolution passed by the members in EGM, for the Bonus issue of shares. 
• Certified true copy Board Resolution passed by the Board of Directors, for allotment of   shares
• List of Allottees.

         Form PAS-3 is digitally signed by the Director, Manager, CEO, CFO, or Company 

         Secretary of the company and certified by CA/CS/CMA in whole-time practice.

         The eForm will be auto-approved ROC on STP Mode.       

Government fees applicable on e-form PAS-3

Additional fees shall be applicable on e-form PAS-3

1. Issue share certificate to the shareholders within two months from the date of allotment of bonus issue or inform the details of allotment of shares to the Depository in case share in demat form.
2. Making necessary Entries in the Register of Members.

RESTRICTIONS ON WITHDRAWAL OF BONUS ISSUE:

Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014 specifies that the company which has once announced the decision of its Board of directors for recommending a bonus issue shall not subsequently withdraw the same. 

TAX ASPECTS ON THE ISSUE OF BONUS SHARES

The bonus shares are taxable in the hands of shareholders of the company at the time of sale of bonus shares. The cost of the acquisition of bonus shares shall be considered zero. The shareholders have to pay short-term capital gain tax or long-term capital gain tax, as the case may be, on the sale price of such shares at the time of sale of bonus shares.

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