THE COMPANIES ACT 2013: SECTION 63 - BONUS SHARES
Updated: May 9
In this article we are going to explore the concept of Bonus Shares and about the Section 63 of Companies Act 2013, In which they are being dealt.
Before understanding the concept of Bonus Shares, Let’s recall about Shares,
A ‘Share’ is a part/share in a company’s capital. Or In other words, A share is a Unit of Company’s common stock and the holder of it is known as Shareholder.
Now, Let’s dive into Bonus Shares. As the name suggests “Bonus”, stands for something in addition to the basic, or a kind of reward. So, when some additional shares are offered/given to existing shareholders is known as issuing of Bonus shares.
Definition- Bonus Shares
According to Section 63 - Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are the company's accumulated earnings which are not given out in the form of dividends, but are converted into free shares.
What are the sources for Bonus Shares?
Company can issue fully paid-up bonus shares out of:
1. Free Reserves;
2. Security premium;
3. Capital Redemption Reserve Account
However, the company can't issue Bonus Share out of revaluation reserve.
What are the conditions to issue Bonus Shares?
Company can issue Bonus Share if:
a. It is authorized by its articles;
b. It’s recommended by the Board and authorized in General Meeting as Ordinary Resolution;
c. It has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus;
d. Partly paid-up shares, if any outstanding on allotment date are made fully paid up;
e. If listed in the company, it shall comply with SEBI Guidelines.
Prerequisites For Issue of Bonus Shares
Prior to the issue of bonus shares, there are some conditions that must be ascertained. They are as follows:
Ensure that the Articles of Association authorizes it, if not then the Articles of Association needs to be altered in accordance with Section 14 of the Act.
Verify that the authorized capital is sufficient for the issue of Bonus shares. If it is not, then the Memorandum of Association has to be altered to increase the authorized capital.
The issue must be authorized at the General Meeting by shareholders.
Ensure there are no defaults in payment of interest or principal of the fixed deposit or debt security issued by the company.
The company must also ensure that there are no defaults in payment of statutory dues to the employees like gratuity, bonus, or contribution to the provident fund.
Ensure that all the shares are fully paid, if not then they must be fully paid
The company must check the availability of all its resources.
Procedure For Issue Of Bonus Shares
The following are the steps to be adhered by the company for the issue of Bonus shares.
Call a Board Meeting: The first step to be taken is to call for a Board Meeting. As per Section 173(3) of the Act, the issue of the notice must be at least 7 days before the Board Meeting.
Convene a Board Meeting: The company must then hold the Board Meeting and place the agenda. To convene the meeting, the following must be ensured:
Ensure the meeting has the required quorum that is ⅓ rd of the total strength of the Board.
Place the board resolution for approving the issue subject to the approval by shareholders in a general meeting by an ordinary resolution.
Ensure that the resolution is passed.
The ratio of the bonus shares must be fixed.
Decide the date, time and venue for the general meeting and authorize a director to send notices for the same.
3. Circulate draft minutes: The draft minutes must be circulated within the stipulated time to all directors for their comments. For a public company, the board resolution in the form MGT – 14 must be filed in less than 30 days with the Registrar of Companies.
4. Send Notice of General Meeting: The notice for the General Meeting for approving the issue of bonus shares must be sent out to all directors, shareholders, auditors and all members entitled to receive, giving no less than 21 clear days for the same.
5. Convene the General Meeting: The Extraordinary General Meeting must be convened, and the issue of bonus shares must be authorized by passing Ordinary resolution by simple majority as per section 114(1) of the Act and authorize the Board to allow the bonus shares.
6. Convene a Board Meeting: The company must convene a Board Meeting approving the allotment of the bonus shares and follow all the protocols for the same.
7. File Form No. PAS -3: The company must then file the return of allotment in the Form PAS – 3 within 30 days of allotment of securities of the company having a share capital. The attachments required will be as mentioned here below:
Copy of the Ordinary Resolution passed in the Extraordinary General Meeting.
Copy of Board resolution approving allotment of shares.
List of allottees mentioning the name, address, occupation if any, and a number of securities allocated to each of the allottees and the list will be certified by the signatory of the Form PAS-3.
Any other documents may be applicable.
8. Issue of share certificates: The company must inform the depository immediately on allotment when the shares are held in DeMat form, if they are held in physical form then the share certificates must be issued within 2 months from the date of allotment.
Advantages of Bonus Shares
For a company:
It can help the company to conserve cash by issuing shares in lieu of dividend.
It brings about a balance in the pricing of the share. Since the issue is only a book entry, the total shareholding is constant; however, the number of shares has increased.
It brings the share capital in line with the assets employed.
It helps in the capitalization of reserves.
For a shareholder:
It increases the investments of the shareholder, and it is tax-free. – It assures the company’s policy for long term growth.
It increases the cash dividend receivable in the future, as the number of shares held by the shareholder has increased.