How to Issue Bonus Shares?

Bonus shares are additional shares given to the present shareholders for no additional cost based on the number of shares held by the shareholder. Announcing a share bonus can help a company capitalize a part of its reserves and surplus and/or reduce the price of shares, thereby increasing its marketability. In this article, we look at the procedure for issuing bonus shares in India.

Why share bonuses are issued?

Bonus shares are mainly book transactions that help a company bring its share capital in line with the assets employed and/or reduce the share price. By reducing the share price of a company by increasing the number of stocks outstanding, the value of the shares are kept constant, while making the share more affordable to average investors.

Hence, in a share bonus issue, though the quantity of shares held by all shareholders would increase, the value of the share holding would remain the same as before the issue.

Preparing for Issue of Bonus Shares

To Issue Bonus Shares, a Board Meeting must be called for by the company by providing atleast seven days notice to the Board of Directors.

Conduct Board Meeting

In the Board Meeting conducted as per the 1. In the board meeting, a board resolution must be passed for bonus share issue by the Directors along with details of the ratio of shares to be issued, date/time for sending notice to members and issue of notice of extraordinary general meeting.

Format for Notice & Board Resolution for Issue Bonus Shares

NOTICE is hereby given that an Extra Ordinary General Meeting of the members of ______________ will be held on _______________ at _____________ to transact the issuing of bonus shares:

To consider and if thought fit, to pass with or without modification, the following resolution as an Ordinary Resolution:

“RESOLVED THAT upon recommendation of the Board of Directors of the Company, subject to the approval of Reserve Bank of India and other appropriate authorities wherever applicable and pursuant to the provisions of Section 23 ,63 and other applicable provisions, if any, of the Companies Act, 2013 read with Companies (Share Capital and Debentures) Rules, 2014 and Article 125 of the Articles of Association of the Company and subject to the guidelines issued by Securities Exchange Board of India (SEBI) in this behalf and subject to such approvals, consents, permissions, and sanctions as may be necessary from appropriate authorities, consent of the members be and is hereby accorded to Board of Directors of the Company ('the Board' which term shall be deemed to include any committee thereof) for capitalizing a sum Rs. _______________ accounted as security premium account in the books of the company and the said amount be applied for paying up in full ____________ number of shares, unissued Equity Shares of face value of Rs. __/- each of the company to be allotted ,distributed, or credited as fully paid-up “Bonus Shares” at par in proportion of 1 (one) such new Equity share for every _______ existing equity share, held by such members as on the Record Date ,t o be hereafter fixed by Board) and the Bonus Shares so distributed shall for all purpose be treated as an increase in the paid-up share capital of the Company held by each such member, and not as income or in lieu of dividend.

FURTHER RESOLVED THAT for the purpose of giving effect to this resolution, any of the Directors be and are hereby authorized to do all such acts, deeds, matters and things, as they may in their absolute discretion, deem necessary to settle any question or difficulty whatsoever that may arise in regard to issue and distribution of new Equity Shares as they think fit and its decision shall be final and binding on all members and other interested persons.

On completing the Board Meeting, file Form MGT-14 within thirty days with the Ministry of Corporate Affairs along with a copy of the resolution for the issue of bonus shares.

Issuing New Shares

Next a general meeting must be conducted and a normal resolution for issue of bonus shares must be passed. Followed by a Board Meeting to approve the allotment of shares. Once the allotment of shares is approved, PAS-3 must be filed within 30 days of passing of board resolution for allotment of shares along with the ordinary resolution for issue of bonus shares, board resolution for allotment of share and list of allottees.

Next the company can issue share certificates to the allottees within 2 months to complete the issue of bonus shares.

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Frequently Asked Questions

Common questions about Issuing Bonus Shares in India: A Financial Process Guide.

Bonus shares are issued to capitalize a part of the company's reserves and surplus, and/or reduce the price of shares, thereby increasing their marketability. This helps bring the share capital in line with the assets employed and makes the shares more affordable for average investors.

When a company issues bonus shares, the quantity of shares held by all shareholders increases, but the value of their shareholding remains the same as before the issue. The price of each share decreases proportionately, but the overall value of the shareholding does not change.

The procedure for issuing bonus shares involves conducting a Board Meeting, passing a board resolution for the bonus share issue, sending a notice to members, conducting an Extraordinary General Meeting, passing an ordinary resolution, allotting the bonus shares, and filing the required forms with the Ministry of Corporate Affairs.

Yes, the issue of bonus shares is governed by the Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules, 2014. The company must comply with the relevant provisions and obtain necessary approvals from regulatory authorities like the Reserve Bank of India and the Securities and Exchange Board of India (SEBI).

The Board of Directors determines the ratio of bonus shares to be issued, typically based on the company's financial position, reserves, and other factors. The ratio is specified in the board resolution and the ordinary resolution passed by the shareholders.

The record date is the date on which the company determines the shareholders who are eligible to receive the bonus shares. The bonus shares are allotted to shareholders based on their existing shareholding as on the record date.

Bonus shares are distributed or credited as fully paid-up shares to the existing shareholders in proportion to their shareholding. For example, if the ratio is 1:5, one new bonus share will be issued for every five shares held by the shareholder.

The issue of bonus shares does not involve any cash outflow from the company. Instead, it capitalizes a part of the company's reserves and surplus, which are transferred to the share capital account. This may lead to a reduction in the company's reserves and surplus.

Yes, bonus shares can be traded like regular shares once they are credited to the shareholders' demat accounts or physical share certificates are issued. They carry the same rights and benefits as the existing shares of the company.

The issue of bonus shares does not change the company's market capitalization, as the overall value of the company remains the same. However, it may increase the liquidity and trading volume of the shares due to a lower share price and increased affordability for retail investors.