Issue of Bonus Shares
Bonus Shares are given to shareholders as some additional shares, based upon the number of shares the shareholders hold in the Company. The accumulated earnings of a company sometimes are not distributed as Dividend but are issued as Bonus Shares. These shares are issued to the current shareholders without receipt of any consideration from them. Bonus Shares increases the marketability of the Company. The main intention behind Bonus Issue is to bring the nominal capital of the Company in line with the assets.
How are bonus shares issued?
A company can issue fully paid-up bonus shares to its members out of its free reserves, the securities premium account or the capital redemption reserve account. However, no issue of bonus shares shall be made by capitalizing reserves created by the revaluation of assets. Also no bonus shares shall be issued in lieu of dividend.
Who is ineligible to issue bonus shares?
The following companies are ineligible to issue bonus shares:
- A Company who has defaulted in repayment of deposit.
- A Company who has defaulted deposit interest.
- A Company who has defaulted in debt securities.
- A Company who has defaulted in respect of payment of statutory dues of the employee’s viz., contribution to Provident Fund, Bonus and Gratuity.
- A Company who has any unpaid outstanding partly paid shares
What are the pre-requisite conditions to issue bonus shares?
- The issue of bonus shares must be authorized by the Articles of the company.
- The issue of bonus shares must be recommended by the resolution of the Board of Directors.
- This recommendation must be later approved by the shareholders of the company in the general meeting.
- The Controller of Capital Issues must give permission to the issue.
What are the benefits of issue of bonus shares?
- The investor is not required to pay any tax upon receiving the bonus shares.
- It is specifically beneficial for the investors who believe in the long-term story of the company and want to increase their investment in the same.
- Issuing additional shares and using cash for the business growth of the company increases the investor’s belief in operations of the company.
- If the company starts paying the cash dividend in the future, the investor receives more because he holds a number of shares in the company due to past policy of paying a stock dividend.