Bonus issue refers to a further issue of shares made by a company having share capital to its existing share holders without receipt of any consideration from the shareholders for issuance of the shares. It is an offer of free additional shares to existing shareholders in proportion to their holdings. For example, the company may give one bonus share for every five shares held. These are company’s accumulated earnings which are not given out in the form of dividends, but are converted into free shares.
While the issue of bonus shares increases the total number of shares issued and owned, it does not change the value of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant.
Companies issue bonus shares to encourage retail participation and increase their equity base. When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared.
Companies Act, 1956, does not prescribe any specific procedure or conditions for issue of bonus shares except that Table A contains provision relating to capitalization of profits. Companies Act, 2013 on the other hand has detailed the conditions for issue of bonus shares and also the sources from which bonus issue can be made. Issue of bonus shares is covered under Section 63 of the Companies Act, 2013 read with rules issued there under.
Conditions to be fulfilled for bonus issue are as follows:
1. Only fully paid up bonus shares can be issued to the members.
2. Authority must be contained in the articles of association.
3.Bonus issue must be authorised by the members of the company on the recommendation of the Board.
4.Company shall not have been a defaulter in payment of interest or repayment of deposits thereon and also in respect of the payment of dues to the employees such as gratuity, provident fund etc.
5.The bonus shares shall not be issued in lieu of dividend.
Bonus shares can be issued by way of :
1. Securities Premium Account
2. Capital Redemption Reserve
3. No bonus shares shall be made out of the revaluation reserves.