Provisions relating to Issue of Bonus Shares:
The undistributed profits, after the necessary provisions for taxation, are the property of the equity shareholders and the same may be used by the company for distribution as dividends to them. But the sound financial policy demands that some of the profits at least must be ploughed back into the business. Thus when a company has accumulated substantial amount of past profits as might be found in the credit of capital reserves, revenue or general reserve of profit and loss account; it is desirable to bring the amount of issued share capital closer to the actual capital employed as represented by the net assets (Assets – Liabilities) of the company. This would reflect the true amount of capital invested by the shareholders in the company.
For example, the capital, which the shareholders have contributed for shares, is clearly visible since this was contributed in cash. But the capital, which they have contributed in the form of accumulated profits, remains unknown because this was not a direct contribution in cash.
In order to rectify these, accumulated profits in full or in part are capitalized, that is, accumulated profits are converted into shares. Shares are distributed free of charge and therefore are known as Bonus Shares, which are given to existing shareholders pro rata to their holdings. It may be added the bonus shares may be issued to make up the existing partly paid shares as fully paid.
a) Company’s cash resources may not be sufficient to pay dividend in cash.
b) Company wants to build up cash resources for expansion or for repayment of a liability.
c) Company may want to bring its paid up capital more in line with the capital resources employed in the business.
d) It may be required to with a view to bringing down the rate of dividend though not the quantum of dividend on the issued capital of the company.
SEBI GUIDELINES on the issue of bonus shares
There are no guidelines for issuing bonus shares by the private companies or unlisted public companies have been issued by the SEBI. However, the listed public companies for issuing bonus shares to the shareholders must comply with the guidelines issued by the SEBI. The requirements of the guidelines of SEBI are given below:-
a) Right of FCD/PCD holders: No company shall pending the conversion of FCDs/PCDs issue any shares by way of bonus unless similar benefit is extended to the holders of FCDs/PCDs, through reservation of shares in proportion to such convertible part of FCDs/PCDs. The shares so reserved may be issued at the time of conversion of such debentures on the same terms on which the rights or bonus issues were made.
b) Out of free reserves: the bonus issue shall be made out of free reserves built out of genuine profits or share premium collected in cash only.
c) Revaluation of fixed assets: reserves created by revaluation of fixed assets should not be capitalised. If assets are subsequently sold and the profits are realized, such profits could be utilised for capitalization.
d) Bonus issue not to be in lieu of dividend: The declaration of bonus issue, in lieu of dividend, should not be permitted.
e) Fully paid shares: Bonus issue shall not be made, unless the partly paid shares, if any, existing are made fully paid up.
f) No default in respect of deposit/debentures: the company should not have defaulted in payment of any interest or principal in respect its fixed deposits and interest on debentures or redemption of debentures.
g) Statutory dues of the employees: the company should not be defaulted in payment of its statutory dues to the employees such as contribution to PF, gratuity, bonus, minimum wages, workmen’s compensation, retrenchment, payment to contract labour etc.
h) Implementation of proposal: the bonus issue shall be implemented within a period of 15 days after the date of approval of the BoD; it does not require the shareholders’ approval for capitalization of profits or reserves for making bonus issue as per the AoA of the company.
However, if the company is required to get the shareholders’ approval as per AoA of the company for capitalization of profits or reserves, the bonus issue shall be implemented within 2 months from the date of the meeting of the BoD.
i) Provision in the AoA: the AoA of the company should provide the provision for the capitalization profits, i.e. it must authorize the bonus issue, if not, and steps should be taken to alter the AoA suitably.
j) Authorised capital: consequent upon bonus issue if the subscribed or paid up capital of the company exceed the authorised capital, then a resolution shall be passed by the company at its GM for increasing its authorised capital to that extent.
k) Certificate: A certificate duly signed by the issuer company and countersigned by the statutory auditor or the company secretary in practice to the effect that the provisions of the guidelines has been complied with shall be forwarded to the SEBI.
Reserves that can be utilised for issue of bonus shares
Free reserves that can be used for issue of Bonus shares:
a) Surplus in profit and loss account.
b) General reserve.
c) Dividend equalization reserve.
d) Capital reserve arising from sale of fixed assets in cash.
e) Balance in debenture redemption reserve after redemption of debentures.
f) Capital redemption reserve account created at the time of redemption of redeemable preference shares out of the profits.
g) Securities premium account collected in cash.
Reserves not available for issue of Bonus Shares:
a) Capital reserve arising due to revaluation of assets.
b) Securities premium arising on issue of shares on amalgamation or take over.
c) Investment allowance reserve/ Development allowance reserve before expiry of 4 years from the date of creation.
d) Surplus arising from a change in the method of depreciation.
e) Balance in debenture redemption reserve account before redemption takes place.