Every public company lists its shares for public subscription in order to gain capital for its functioning. Buyer of these shares is called shareholders and they play very important role in functioning of company. In order to keep their interest and to give something as a way of gift to the shareholders company distributes bonus shares to them. Bonus shares are given for free of cost to the shareholders.
WHAT IS BONUS SHARE:
Bonus shares are issued by company to its shareholders as a way of gift, it’s basically a way of company to reward their shareholders for acquiring shares of the company. Shareholders get dividend on the shares they own. Sometimes companies issues bonus shares to their shareholders for the dividend, and of the same value as dividend. Companies usually have ratios to issue bonus shares for example – if ratio is 1.7 then shareholder will get 1 share for every 7 shares he holds.
TYPES OF BONUS SHARES:
There are two types of bonus shares, they are as follows,
- Fully paid bonus shares – fully paid bonus shares are those shares which are fully paid and bear no extra cost at the part of the investor.
- Partly paid-up bonus shares – when company sells its shares, they set an issue price of shares and investors buy shares at that particular issue price. But in partly paid-up shares investors can buy shares without making full payment of it, company when in need of the capital calls for such unpaid money from partly paid-up shareholders. so, when bonus is declared, company converts partly paid shares into fully paid without calling for the unpaid money.
ADVANTAGES OF ISSUING BONUS SHARES:
Issuing bonus shares is beneficial for company as well as investors too, advantages of issuing bonus shares are as follows-
- It is beneficial for investors as it increases their total investment and in return, they get higher amount of dividend.
- It keeps investors interested in the company and rewards them for their part in raising capital.
- Investors does not have to pay tax on the bonus shares received.
- Issuing bonus shares will increase the free-floating shares in the market.
DISADVANTEGES OF ISSUING BONUS SHARES:
There are some disadvantages too of issuing bonus shares from companies point of view these are as follows-
- Company do not get any money for issuing bonus shares.
- Company has to pay dividend on the share they distribute as bonus shares.
PROVISIONS REGARDING BONUS SHARES UNDER DIFFERENT ACTS:
COMPANIES ACT –
The important provisions in the Companies Act relating to the issue of bonus shares
are as follows:
(a) The Act does not contain any definition of the term bonus shares.
(b) Schedule I – Table A, which provides for the model Articles of Association of a
Limited Company provides that the bonus issue can be made by capitalising
(c) Fully paid-up bonus shares can also be issued from the Capital Redemption
Reserve and the Share Premium Account.
(d) The Articles of Association of the Company must provide for issue of bonus
shares. If the Articles do not provide for a Bonus issue, then they must first
(e) Bonus shares can also be issued by paying up any amount remaining unpaid
on existing shares.
(f) An unlisted public company and a private limited company can issue bonus
shares even out its revaluation reserve. The recent Supreme Court decision
in the case of Bhagwati Developers v. Peerless General Finance &
Investment Company (2005) 62 SCL 574 (SC) has laid the controversy
over this issue to rest.
SEBI GUIDELINES –
The SEBI DIP Guidelines contain certain additional provisions for the issue of
bonus shares by a listed company. The important provisions may be summarised as
(a) If any FCDs/ PCDs are pending conversion, then a bonus issue cannot be
made unless a similar benefit is extended to the holders of such FCDs/
(b) The bonus issue shall be made out of free reserves built out of the genuine
profits or out of share premium collected in cash only. Thus, if shares are
issued for consideration other than cash, then premium on such shares
would not be considered.
(c) Bonus shares cannot be issued out of revaluation reserves by a listed
(d) Bonus, in lieu of dividend, is not allowed.
(e) The bonus issue is not made unless the existing partly-paid shares are made
(f) The Company:
has not defaulted in payment of interest or principal on fixed deposits and
interest or principal on existing debentures and
has sufficient reason to believe that it has not defaulted in respect of the
payment of statutory dues of the employees such as contribution to
provident fund, gratuity, bonus etc.
(g) Once the approval of the Board of Directors for the bonus issue is received,
the company must implement the proposal within 6 months from the date of
such approval and it shall not have the option of changing the decision.
FEMA GUIDELINES –
The FEMA Regulations permit an Indian company to issue bonus shares to its non-resident shareholders, subject to the following conditions:
(a) the original is acquired or held by the non-resident shareholder in
accordance with the FEMA Rules/ Regulations applicable to such acquisition;
(b) the bonus shares acquired by the non-resident shareholder shall be subject
to the same conditions including restrictions in regard to repatriability as are
applicable to the original shares.
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