A bonus issue occurs where the company does not distribute its profits and reserves by way of dividend, but retains them and uses them to pay for the issue of new fully paid shares. The shares so issued are called ‘Bonus Shares’. Thus issue of bonus shares implies the payment of dividend in the form of shares instead of cash. These new shares are allotted to equity shareholders in proportion to their existing holdings.
As a result of such an issue the holders of existing equity shares receive few additional fully paid shares which have been paid for out of the accumulated profits of the company and the company’s issued capital increases, whereas the company’s assets remain intact. It is for this reason that such an issue is termed as ‘capitalisation of undistributed profits.’ It may be recalled that the ‘capital redemption reserve account’ under Section 80(5) and the ‘share premium account’ under Section 78(2), can also be applied towards the issue of bonus shares.
A bonus issue must not be confused with a ‘rights issue.’ In the case of bonus issue no payment is made by the shareholders but instead the company applies its profits and reserves for that purpose, whereas payment is made entirely by shareholders subscribing fresh capital in the case of ‘rights issue.’ A bonus issue is usually made by a company intending to bring its ‘issued capital’ more into line with the true worth of its undertaking, so that its annual net profits may not appear to be unduly high as compared with its paid-up capital.
Conditions for issue of bonus shares :
For making an issue of bonus shares, the following conditions must be complied with:
(1) Sufficient undistributed profits must be there.
(2) Articles must permit such an issue.
(3) Suitable resolution by the Board of Directors must be passed.
(4) Formal approval of the shareholders in a general meeting must be secured.
(5) Permission of the ‘Controller of Capital Issues’ must be obtained under the Capital Issues Control Act, 1947, regardless of the amount involved. There is no lower exemption limit in case of bonus share because care is taken to see that the company does not get over-capitalised in the process, and that the issue satisfies the guidelines prescribed by the Government in that regard. It is worth noting here that the said permission is required to be obtained by every company whatsoever—private company, banking and insurance company, government company and public company.
Procedure on Issue of Bonus Shares :
The secretarial procedure followed in the issue of bonus shares may briefly be stated as follows :
(1) To ensure that Articles permit the issue of bonus shares. If not, the Articles should be suitably amended.
(2) To ensure that the bonus issue is within the limits of authorized share capital of the company. If not, memorandum and articles have to be suitably amended.
(3) To convene a meeting of the Board of Directors:
- to consider the proposal for ‘Bonus Issue’ and the proportion in which the same should be issued.
- to fix up the date, time, place and agenda of the extra-ordinary general meeting to be convened for securing the approval of the shareholders.
- to approve the date of closing the Register of Members and transfer books.
(4) If the company’s shares are listed on a Stock Exchange, to notify the Exchange of the date of the Board meeting which will consider the issue of bonus shares and further to notify the Exchange of the decision in that regard immediately after a formal decision has been taken.
(5) To issue notices to members relating to the aforesaid general meeting along with the explanatory statement.
(6) To pass a resolution in the general meeting, as per Articles. If it is a special resolution a copy thereof to be filed with the Registrar within 30 days.
(7) To obtain the permission of the Controller of Capital Issues regardless of the amount involved.
(8) To obtain the approval of stock exchange(s) for the procedure to be followed for allotment of bonus shares.
(9) To obtain the approval of the Reserve Bank of India, under the foreign Exchange Regulation Act, 1973, for allotment of bonus shares to non-resident members, if any.
(10) To prepare ‘provisional allotment sheets’ i.e., the lists of members showing their present shareholding and the number of bonus shares to which they are entitled.
(11) To convene another Board meeting: (i) to approve the ‘provisional allotment sheets’ and to pass an allotment resolution, and (ii) to approve the date of closing the Register of Members and transfer books.
(12) To give a public notice in some leading newspaper regarding the closure of Register of Members and transfer books for the purpose of issue of bonus shares. (A specimen of such a notice is given at the end of this chapter)
(13) To issue Allotment Letters to the members along with a circular-explaining how the allotment has been made.
(14) To file with the Registrar within 30 days of allotment a ‘Return of Allotment’ stating: (i) the number and nominal amount of the bonus shares so allotted; (ii) names, addresses and occupations of the allottees; and (iii) a copy of the resolution authorising the issue of such shares [Sec. 75(1) (c)(i)].
(15) To make necessary entries in the Register of Members.
(16) To prepare and issue new share certificates.