Bonus issue of shares
Reward your shareholders with additional shares at no extra cost through our seamless bonus issue process, as per the Companies Act, 2013.
Overview
A “bonus issue of shares” is what is meant when the Companies Act of 2013 refers to the issuance of extra shares to existing shareholders of a company without any compensation or payment from the owners A public limited company gets its equity capital from the investment made by the shareholders. Hence the shareholders expect a return on their investment. The company can do the same either by declaring cash dividends or bonus shares. Bonus shares are accumulated profits that a company distributes to the current shareholders as free shares. There are no additional costs involved, and the shares are given the basis of the current holding of shareholders.
Cash dividends are actual transactions, and there is a payout involved. However, in the case of bonus shares, there is no payout, and it is just a book entry where Reserves are capitalized.
Important Characteristics
- The Fundamental Goal of a Bonus Issue: The primary objective of a bonus issue is to capitalize on the accumulated earnings or reserves of the company and to reward existing shareholders by increasing their shareholding proportion without diluting their ownership. This is achieved by issuing additional shares to current shareholders at no extra cost.
- Sources for Funding Bonus Shares: The accumulated earnings of the companies, an account for securities premiums, or a capital redemption reserve account are the sources that are used to fund the issuance of bonus shares by the companies. The shares are not issued through the solicitation of additional funding from third-party sources.
- Proportional Allocation of Bonus Shares: Bonus shares are often allotted to current owners in a manner that is proportional to the existing shareholdings they already possess. This practise is known as proportional allocation. For instance, if a corporation decides to do a bonus issue in which the ratio of bonus shares to existing shares is 1:1, then each shareholder will get one bonus share for every share that is currently held.
- Transformation of Reserves into Share Capital: The bonus issue allows companies to convert their accumulated earnings or reserves into share capital. This strengthens the company’s capital base and improves its financial position by capitalizing the reserves.
- Approval from Shareholders: Both the board of directors of the companies and the shareholders present at the Extra Ordinary General Meeting (EGM) / Annual General Meeting (AGM) need to give their blessing in order for the bonus issuance of shares to go through. Approval from the shareholders is achieved through the use of a special resolution.
- Impact on Share Capital and Share Premium: The bonus issue does not result in an increase in the authorised share capital of the companies. This has repercussions for both the share price and the share premium. Despite this, it raises the total amount of issued and paid-up share capital. A reduction or adjustment is made to the share premium account, if there is one; this is determined by the bonus issuance.
Compliances
- Approval from the Board of Directors: The company’s board of directors is required to vote in favour of a resolution that gives its blessing to the distribution of bonus shares. The bonus share ratio as well as the total number of bonus shares should be specified in the resolution.
- Approval of Shareholders: In order to proceed with the bonus issuance of shares, the shareholders will need to provide their approval at Extra Ordinary General Meeting (EGM)/ the Annual General Meeting (AGM) in the form of a special resolution. The agenda item dealing with the bonus issue ought to be included in the notification of the annual general meeting.
- Reserves Are generally Capitalised: The process of capitalising the company’s accumulated earnings or reserves is generally done in order to pay for the bonus issuance. It is essential for businesses to guarantee that they have adequate accumulated earnings or reserves that may be converted into capital.
- Adjustment of Share Premium: Depending on whether or not the companies maintains a share premium account, the share premium may need to be changed or lowered in order to be in line with the bonus issuance. Companies have a responsibility to ensure that they are in compliance with the provisions of the Companies Act 2013 governing the application and handling of share premium.
- Disclosure and paperwork: Businesses are required to produce and keep adequate paperwork connected to the bonus issue. This documentation may include board resolutions, minutes of the annual general meeting, and other records that are pertinent. They are responsible for ensuring that the bonus issue is disclosed appropriately in the financial statements as well as any other relevant filings.
- Timely Implementation of Bonus Issue: Once the shareholders have approved the bonus issue, the company is obligated to implement it within the allotted time frame. This involves making appropriate entries in the company’s records, issuing new share certificates, and updating the share registry with the latest information.
Benefits
- The Companies are able to capitalise its accumulated earnings or reserves by turning them into share capital through the issuance of bonus shares. The capital basis of the companies is bolstered as a result, and the company’s overall financial condition is improved.
- Increased Liquidity Bonus offerings increase the number of outstanding shares without requiring any financial outflow from owners. This results in an increase in the overall liquidity of the company. This raises the liquidity of the company’s shares in the market, which may encourage an increase in the number of investors as well as a boost in the volume of trading activity.
- Enhancement of Shareholder Value Bonus issues allow current shareholders to hold a greater number of shares without having their ownership % reduced, which results in an increase in shareholder value. This raises the value of the shareholder’s ownership in the companies without requiring them to make any extra financial contributions.
- Because bonus issues sometimes result in a rise in the number of shares held by shareholders, the marketability of the company’s shares can often be improved as a result. The greater number of shares that are already outstanding may pique the interest of additional investors, which might potentially lead to an increase in the demand for the company’s shares.
- The market has a tendency to form a favourable opinion of a company once it has made public announcements regarding the issuance of bonus shares. It is possible to interpret this as an indication that the companies is confident in its financial health, growth prospects, and dedication to repaying shareholders.
- Bonus issues can be helpful in the process of keeping current shareholders by supplying them with more shares as a reward for their loyalty and long-term commitment in the companies. This helps to ensure that shareholders will continue to have an interest in the company in the future. This can have the effect of discouraging shareholders from selling any of their current shares, which contributes to maintaining a stable shareholder base.
- As a result of a rise in the number of shares that are now outstanding, the trading price per share may become reduced. Because of the drop in their trading price, the company’s shares may now be more within the financial means of a wider variety of investors.
Process
- Performing an Analysis of the company’s Financial Position: The company has to perform an analysis of its financial position in order to evaluate whether or not it has adequate accumulated profits or reserves available for capitalization in the form of a bonus issue. Regarding the utilisation of reserves, the organisation is responsible for adhering to the standards that are outlined in the Companies Act of 2013.
- Approval from the Board of Directors: The company’s board of directors is required to vote in favour of a resolution that gives its blessing to the distribution of bonus shares. The bonus share ratio as well as the total number of bonus shares should be specified in the resolution.
- Approval of the Shareholders: In order to proceed with the bonus issue, the shareholders will need to provide their approval at the EGM/ AGM in the form of a special resolution. The agenda item dealing with the bonus issue ought to be included in the notification of the EGM/ AGM.
- Examination and permission by the Registrar of Companies: Once the company has obtained the permission of its shareholders, it is required to file the relevant paperwork with the Registrar of Companies (RoC) so that they may be examined and approved. Among the necessary records are the board resolution, any special resolutions, audited financial statements, and any other pertinent records that may be required.
- Approval from the RoC: After reviewing the documentation, if the RoC is content with the compliance, it will issue a Certificate of Compliance. If it is not, the RoC will not approve the application. This certificate serves as evidence that the RoC gave their consent to the bonus issuance.
- Issuance of Bonus Shares: Once the permission of the RoC has been acquired, the company is able to move forward with the process of issuing bonus shares to shareholders who meet the requirements. Generally speaking, the shares are distributed in a manner that is proportional to the existing shareholdings.
- Record Maintenance and Filing: The companies should be sure to keep the appropriate records linked to the bonus issue. These records should include board resolutions, minutes from the annual general meeting, share certificates, and any other pertinent papers. In addition, the companies are obligated to complete the required filings with the RoC, which include bringing the share register up to date and submitting the return of allocation within the allotted amount of time.
FAQs
The term “bonus issue of shares” refers to the process by which current shareholders of a companies are awarded more shares of the company’s stock at no additional cost or in exchange for any other benefit. It is a means to show appreciation for shareholders by raising the proportion of shares they possess in the company without reducing their overall ownership.
The ratio that will be used for a bonus issue is decided upon by the board of directors of the companies and must be ratified by the shareholders during the EGM/ AGM. The ratio indicates the amount of bonus shares that will be distributed to shareholders for each existing share that they already own.
company that has racked up losses cannot, under any circumstances, give bonus shares to its shareholders. The accumulated earnings or reserves that are available for capitalization are the sole sources from which bonus shares can be issued.
No, the shareholders are not required to make any kind of payment in order to get bonus shares. As a reward or a capitalization of earnings, current shareholders might get cost-free bonus shares as a reward from the company.
In order to be eligible for deductions under Section 80G of the Income Tax Act, you are required to provide specific information of your charitable contributions in your income tax return. Along with the amount of money provided, you are required to submit the name, address, and PAN (Permanent Account Number) of the organisation that will benefit from your contribution. Make sure that as evidence of the donation you have gotten the appropriate receipts or acknowledgments from the organisation that was the beneficiary of your generosity
The answer to this question is yes; bonus shares are able to be transformed into dematerialized form. Shareholders have the ability to make a request to their depository participants (DPs) to have their physical bonus share certificates converted into electronic form. This will make trading and owning the shares much simpler.
No, the authorised share capital of the company will not change as a result of the issuance of bonus shares. Because the shares are issued from the company’s already-existing authorised share capital, the only increase in the company’s share capital that results from the bonus issue is an increase in the amount of shares that have been issued and paid for.
