Bonus Issue

(Rewarding shareholders through capitalization of reserves)

Overview

A Bonus Issue is a corporate action through which a company distributes free additional shares to its existing shareholders in proportion to their current shareholding, by capitalizing its accumulated profits or reserves. Instead of paying dividends in cash, the company rewards shareholders with additional shares, thereby increasing the overall number of shares in circulation while keeping the overall value of investment unchanged.

Bonus Issues are a strong signal of corporate strength and future confidence. Although there is no fresh inflow of funds into the company, bonus shares increase the liquidity and market perception of the company. It is a tax-efficient way to reward shareholders and also improves retail participation in the company’s equity due to reduced per-share price (post-issue).

Bonus shares are issued without any consideration, making them a popular choice among companies with substantial reserves and a long-term shareholder focus.

Key Benefits

·       Shareholder Reward: Bonus shares are a way of distributing company profits without depleting cash reserves.

·       Improved Liquidity: Increases the number of shares in the market, enhancing tradability.

·       Better Market Perception: Reflects the company’s strong financial position and growth outlook.

·       Reduced Share Price: Per-share price drops proportionately post-bonus, making shares more affordable for small investors.

·       No Tax Liability (in hands of shareholders): Unlike dividends, bonus shares are not taxable at the time of receipt.

·       Increased Shareholder Base: Promotes wider shareholding and better stock market participation.

Applicable Laws & Regulatory Framework

Bonus Issues in India are regulated under:

·       Companies Act, 2013 – Section 63 and Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014

·       SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 – for listed companies

·       SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) – for continuous disclosures by listed companies

·       Income Tax Act, 1961 – capital gains tax may apply when bonus shares are sold, not on receipt

·       Stock Exchange Listing Conditions

Bonus shares can be issued only from free reserves, securities premium, or capital redemption reserve, and not from revaluation reserves.

Eligibility / Ideal For

Bonus Issues are ideal for:

·       Companies with strong reserves and surplus profits

·       Listed companies looking to increase retail participation and improve liquidity

·       Family-run or promoter-driven businesses wanting to reward shareholders without reducing cash reserves

·       Companies preparing for IPO or follow-on public offerings seeking to restructure shareholding

Procedure

1.     Board Approval

The Board of Directors considers and approves the bonus issue, including the ratio and record date.

2.     Shareholder Approval (if required)

If the Articles of Association (AOA) do not permit bonus issues, shareholder approval by ordinary resolution is obtained first. If permitted, no general meeting is required.

3.     Verification of Reserves

The company ensures that the bonus issue is made from eligible reserves and that the authorized share capital is sufficient. If not, the capital clause is altered.

4.     Filing with ROC and SEBI

In case of listed companies, intimation to SEBI and stock exchanges is made before the record date. Form PAS-3 is filed with the ROC after allotment.

5.     Fixing Record Date

The company announces a record date to determine the list of eligible shareholders.

6.     Allotment of Bonus Shares

Bonus shares are credited to shareholders’ demat accounts in the declared ratio, without any consideration.

7.     Post-Allotment Compliance

Updated capital structure is filed with statutory authorities, and disclosures are made in the Directors’ Report and financials.

Timelines

A Bonus Issue is usually completed within 30 to 60 days, depending on:

·       Whether shareholder approval and amendment to AOA is required

·       Timely dispatch of notice, record date declaration, and credit of shares

·       Regulatory clearances for listed companies

For listed companies, SEBI mandates bonus shares to be credited within 15 days of Board approval, if shareholder approval is not required, or 2 months from shareholder approval otherwise.

How LTC Helps

At Law to Corporate, we provide comprehensive support for executing Bonus Issues with legal accuracy and efficiency:

·       Advising on eligibility, reserves, and bonus ratio

·       Drafting Board and shareholder resolutions

·       Assisting in AOA amendments, if required

·       Filing ROC and SEBI forms and handling disclosures

·       Coordinating with RTA and stock exchanges for credit of shares

·       Ensuring full legal and procedural compliance

Our team ensures a seamless bonus issuance process that enhances shareholder satisfaction while maintaining robust legal governance and reporting.