Introduction

Bonus shares mean giving current shareholders free additional shares. A business can decide to issue additional shares to raise dividend payments.

The company may issue bonus shares by restructuring its reserves. The issuing of incentive shares increases the company’s cash flow, but the company’s net assets remain the same.

Bonus Shares shall be owned in proportion to the amount of shares held by the current shareholders. The owners are given additional shares. It is the additional issue of shares by a corporation without any regard of its current shareholders.

Do you know a private company can distribute dividends?
Check out dividend distribution and how you can distribute it in a Pvt. Ltd. Co.

Major points for the issue of bonus shares

The articles of Association must contain a provision for the issue of bonus shares.

The Company shall have in Articles of Association an article to issue bonus shares. Otherwise, the Articles of Association shall be changed as provided for under the act.

Sufficient authorized capital

The company must have enough capital authorized to issue bonus shares; if not, the authorized share capital as provided for in the act must be increased by that company.

If the company has  defaulted in any of the following manner

  • Payment of fixed deposit or debt securities interest principal.
  • Payment of legal employee duties, such as PF fees, gratuities, and bonuses.

The bonus can be issued only when the above conditions are fulfilled.

Partly paid-up shares required to be fully paid up

If the company has the partially paid-up shares that remain on the allocation date, the shares are paid fully later on.

Sources of bonus shares

The bonus shares must be fully paid up and any of the following can issue them:

I. Company’s Free Reserves

II. The Capital Redemption Reserve Account

III. The Securities Premium Account.

Note: Provided that no issue of bonus shares shall be made by capitalizing reserves created by the revaluation of assets

Process of issue of bonus shares

1. Circulate Board Meeting Notice

Circulate Notice & Agenda at least seven days before the meeting of the Board of Directors.

Note: A Board meeting can be called upon to deal with emergency business at a shorter notice under a condition specified in section 173(3) of the regulations.

2. Hold a Board Meeting

  • Confirm quorum (1/3rd of the total strength of the Board or 2 members of the Board of Members, whichever is higher)
  • To consider and propose to current shareholders the question of bonus shares.
  • To determine the amount and quantity of bonus shares given.
  • Fixing year, year, time, and location for the Extraordinary General Meeting and authorizing the notice called by the Company’s shareholders.

3. Required forms to file

File Form MGT-14 within 30 days of Board Approval, except for private companies.

4. Sending notice of the General Meeting

Sending information of the general assembly to the organization members in writing or by electronic means prescribed by the law not less than explicit twenty-one days’ notice.

5. Organize a General Meeting

Business General Meeting has to be convened to take approval of Bonus shares.

6. Hold a board meeting for bonus shares allocation

Meeting of the Management Board for the settlement of shares assignments and the issue of share certificates.

7. File necessary forms

File Return of the allocation in PAS-3 condition within 15 days after the Allocation Board Resolution passage.

8. Certificates of share issuance

Within 2 months from the date of the distribution of shares, the company shall issue a share certificate to its shareholders.

Looking to increase your company's authorized share capital?
Read to know about necessary ways to do it by staying compliant.

Conclusion

The market is getting back to normalcy and Indian businesses are looking to drive profitability in the coming time. As a result, several businesses mat declare their shareholders’ bonus shares by capitalizing on their free reserves if needed. Whenever there’s a phase of next bullish market, even after accounting for the inevitable post-bonus fall in share prices, shareholders now may greatly benefit from a rise in the floating stock. The goal is to build on profits. And it is safe to assume that the best way to influx capital is by introducing Bonus Shares.