Updated: Mar 16
Bonus Shares are shares issued by a firm with share capital to its current shareholders without receiving any payment from the shareholders. Existing shareholders will receive free additional shares in proportion to their current ownership. Shareholders can be rewarded through bonus issues and stock splits. Bonus shares are additional shares that are offered to present owners at no cost, based on the number of shares that a shareholder owns. These are the company's accumulated earnings that are converted into free shares rather than being distributed as dividends. There are no additional fees, and the shares are distributed based on current shareholder holdings.
Benefits of issuing –
A bonus issue is considered as an alternative by many companies to dividends. It increases the share capital of the Company and makes it attractive for investors. It creates more liquidity and increases retail participation. Bonus shares are essentially the capitalization of profits. This enhances the company’s creditworthiness. The earning per share is reduced as the number of shares is increased by the issue of bonus shares. However, the value of the company remains the same. The value per share is reduced by the split of shares, however, the valuation of the Company remains the same.
Sources of Bonus Shares –
A corporation can offer fully paid-up bonus shares to its shareholders.
· Free reserves,
· Security premium account or
· Capital redemption reserve account
The procedure of Issuing –
· holding a board meeting to determine the bonus share issue ratio,
· approving the bonus share issue subject to shareholder approval and setting the shareholders' general meeting date.
· The company's shareholders must be given at least twenty-one clear days' notice before the meeting to approve the proposed bonus share issue.
· Organizing an extraordinary general meeting to get shareholder approval for issuing bonus shares.
· The Company's board of directors will meet to discuss the distribution of bonus shares to shareholders.
· Within 30 days following the date of stock allotment, the firm must file Form PAS-03 with the Registrar of Companies.
Companies Act 2013 –
Bonus issues of fully paid-up equity shares may be issued out of - Free Reserves of the firm, which are built out of actual profits of the company, according to Section 63. ( not revaluation reserves )
The Securities Premium Account - the realizable cash element of the Securities Premium Account for listed firms, and the Securities Premium Account in cash or other forms for unlisted corporations. For the issuance of Bonus shares, a Capital Redemption Reserve Account – which can be generated from the Buy-Back of shares or the redemption of preference shares out of earnings – can be used. Notably, a corporation may not issue Bonus Shares in instead dividends or from its revaluation reserves.
Form PAS 3 must be filed when such stocks are allotted, according to Rule (12) 6 of the Companies (Prospectus and Allotment of Securities Rules 2014). Without the need for shareholder approvals or amendments to the Articles of Association, an issuer declaring a bonus must implement the bonus issue within fifteen days of the Board of Directors' approval.
Chapter IX of the SEBI (ICDR) Rules for bonuses issued by listed businesses, which includes Rules 92 to 95, must be covered. The essence of these needs is previously outlined in the preceding standards.
There are no precise criteria for bonus issue ratios. As a result, firms can issue Bonus shares in any ratio they like.