The complete information about the bonus shares, SEBI guidelines and its reserves for issue of bonus shares are explained below
Bonus paid to the shareholders can be either cash bonus or capital bonus. A company gives cash bonus to its shareholders only when it has larger reserves and sufficient cash to pay bonus. It is also seen that the payment of cash bonus does not affect the working capital of the company. On the other hand, capital bonus is paid when the company wants to share the accumulated reserves with the shareholders but it is not in a position to pay cash bonus because it adversely affects the working capital of the company. Capital bonus is given by making partly paid shares as fully paid without getting cash from the shareholders or it is given by the issue of free fully paid shares known as bonus, shares.
The following circumstances warrant the issue of bonus shares :
(i) When a company has accumulated large reserves (whether capital or revenue) and it wants to capitalize these reserves by issuing bonus shares,
(ii) When the company is not in a position to give cash bonus because it adversely affects its working capital.
(iii) When the value of fixed assets far exceeds the amount of the capital.
(iv) When the higher rate of dividend is not advisable for the distribution of the accumulated reserves because shareholders will demand the same rate of dividend in future which the directors may not be able to give. To obviate this difficulty, bonus shares are issued to facilitate the payment of the regular dividend from year to year.
(v) When there is a big difference between the market value and paid up value of shares of the company i.e., market value of shares far exceeds the paid up value of shares.
A company issuing bonus shares is better placed in the market. There is a sharp rise in the prices of equity shares following the declaration of bonus issue.
SEBI (i.e., Securities and Exchange Board of India) Guidelines for Issue of Bonus Shares
The company shall, while issuing bonus shares, ensure the following :
(a) The bonus issue is made out of free reserves built out of the genuine profits or securities premium collected in cash only.
(b) Reserves created by revaluation of fixed assets are not capitalized.
(c) The declaration of bonus issue, in lieu of dividend, is not made.
(d) The bonus issue is not made unless the partly paid shares, if any existing, are made fully paid-up,
(e) The company has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption thereof and 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.
(f) A company which announces its bonus issue after the approval of the Board of Directors must implement the proposal within a period of six months from the date of such approval and shall not have the option of changing the decision.
(g) There should be a provision in the Articles of Association of the company for capitalization of reserves, and if not, the company shall pass a resolution at its general body meeting making provisions in the Articles of Association for capitalization.
(h) Consequent to the issue of bonus shares if the subscribed and paid-up capital exceed the authorized share capital, a resolution shall be passed by the company at its general body meeting for increasing the authorized capital.
(i) The company shall get a resolution passed at its general body meeting for bonus issue and in the said resolution the management’s intention regarding the rate of dividend to be declared in the year immediately after the bonus issue should be indicated.
(j) No bonus issue will be made which will dilute the value of rights of the holders of debentures, convertible fully or partly.
No Company shall, pending conversion of fully convertible debentures/partly convertible debentures, issue any shares by way of bonus unless similar benefit is extended to the holders of such fully convertible debentures/partly convertible debentures through reservation of shares in proportion to such convertible part of fully convertible debentures/partly convertible debentures. The shares so reserved may be issued at the time of conversion(s) of such debentures on the same times on which bonus issues were made to shareholders.
Note. Entries for bonus shares reserved for convertible debentures are not to be passed when bonus shares are issued to shareholders. Entries for such reserved] shares will be recorded only when these will be issued to convertible debenture holders in the same way as are passed in case of bonus shares issued to shareholders.
As per SEBI guideline J (a), no bonus issue shall be made within 12 months of any ‘ public/right issue.
SEBI guidelines are silent on ratio of bonus issue. Therefore, a company can issue
bonus shares in any ratio.
Clarification to SEBI Guidelines
A company issuing bonus shares shall forward a certificate duly signed by the issuer and duly countersigned by its statutory auditor or by a company secretary in practice to the effect that the terms and conditions for issue of bonus shares as laid down in SEBI guidelines, have been complied with.
A clarification issued by SEBI on 16-7-1992 states that the share certificate to be issued pursuant to bonus issue shall be issued as far as possible in marketable lots and in respect of the balance, the certificate may be issued in denominations of 1, 5,10 and 50 shares.
Free Reserves that can be Used for Issue of Bonus Shares :
1. Surplus in Profit and Loss Account (i.e., credit balance of Profit and Loss A/c carried forward).
2. General reserve
3. Dividend equalization reserve.
4. Capital reserve arising from profit on sale of fixed assets received in cash.
5. Balance in debenture redemption reserve after redemption of debentures.
6. Capital Redemption Reserve Account created at the time of redemption of redeemable preference shares out of the profits.
7. Securities Premium collected in cash only.
It may be remembered that both the above accounts can be utilized only for issuing fully paid bonus shares and not for making partly paid shares fully paid shares. . .
Reserves (i.e., not Free Reserves) not available for Issue of Bonus Shares are:
1. Capital reserve arising due to revaluation of assets.
2. Securities premium arising on issue of shares on amalgamation or lake over.
3. Investment allowance reserve/Development rebate reserve before expiry of 4 years of creation.
4. Balance in debenture redemption reserve account before redemption takes place.
5. Surplus arising from a change in the method of charging depreciation.