Bonus Issue of Shares: Procedure Under Companies Act 2013
A bonus issue of shares allows a company to reward existing shareholders by allotting additional fully paid shares at no cost. Governed by Section 63 of the Companies Act 2013, this process capitalizes the company's accumulated reserves into share capital. Companies with strong free reserves, securities premium accounts, or capital redemption reserve funds use bonus issues to increase paid-up capital, improve stock liquidity, and signal financial strength to the market. This guide covers every step of the bonus issue procedure, from board resolution to ROC filing, along with the tax treatment, accounting entries, and compliance requirements that company directors and shareholders need to follow.
- Bonus shares are issued free of cost to existing shareholders by capitalizing free reserves, securities premium, or capital redemption reserve under Section 63
- 8 mandatory conditions must be satisfied before a company can issue bonus shares, including no default on statutory dues and fully paid-up existing shares
- The procedure involves board resolution, shareholder approval (ordinary resolution), allotment within 15 days, and Form PAS-3 filing within 30 days
- Bonus shares are not taxable on receipt; capital gains tax applies only on sale, with cost of acquisition treated as NIL for shares allotted after 1 April 2001
- A bonus issue does not change total equity on the balance sheet; it transfers reserves to share capital with zero cash outflow
What is a Bonus Issue of Shares?
A bonus issue is the allotment of additional fully paid-up equity shares to existing shareholders in proportion to their current shareholding, without requiring any cash payment from the shareholders. The company funds this allotment by converting its accumulated reserves into share capital.
For example, in a 1:2 bonus issue, a shareholder holding 200 shares receives 100 additional shares free of cost, bringing their total to 300 shares. The company debits ₹1,00,000 from free reserves (assuming ₹100 face value per share) and credits the share capital account by the same amount. No money changes hands between the company and shareholders.
Companies choose bonus issues to increase stock liquidity by raising the total number of shares in circulation, reward long-term shareholders without cash outflow, signal strong financial health through accumulated reserves, and bring the market price per share into a more accessible trading range for retail investors.
Legal Framework: Section 63 of the Companies Act 2013
Section 63 of the Companies Act 2013 is the primary statutory provision governing bonus issue of shares. This section replaced the earlier provisions under Sections 81 and 205 of the Companies Act 1956 and provides a unified framework for bonus allotment.
Key Provisions of Section 63
Section 63(1) authorizes a company to issue fully paid-up bonus shares to its members out of free reserves, securities premium account, or capital redemption reserve account. The section mandates that the company's Articles of Association must explicitly permit such issuance.
Section 63(2) lays down the conditions and restrictions for bonus issue, including the prohibition against issuing bonus shares from revaluation reserves and the requirement that all existing shares be fully paid up before bonus allotment.
Section 63(3) states that bonus shares cannot be issued in lieu of dividend. This means a company cannot substitute a declared or expected dividend payment with bonus shares.
The procedural rules are further detailed in Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014, which specifies the filing requirements, timelines, and documentation for bonus allotment.
8 Mandatory Conditions for Bonus Issue
Section 63(2) prescribes specific conditions that every company must satisfy before proceeding with a bonus issue. Failure to meet any condition renders the bonus allotment void and exposes directors to regulatory penalties.
| Condition | Requirement | Consequence of Non-Compliance |
|---|---|---|
| Articles of Association Authorization | AoA must explicitly permit bonus issue | Bonus allotment is void; amend AoA first by special resolution |
| Sufficient Free Reserves | Adequate reserves after deducting statutory and contractual obligations | Allotment void; auditor must certify reserve availability |
| Fully Paid-Up Shares | All existing shares must be fully paid up | Partly paid shareholders cannot receive bonus shares |
| No Default on Fixed Deposits | No outstanding default in interest or principal payment on fixed deposits | Bonus issue prohibited until default is cleared |
| No Default on Debentures | No outstanding default in interest or principal on debentures | Bonus issue prohibited until default is cleared |
| No Default on Employee Dues | No outstanding liability for PF, gratuity, bonus under statutory laws | Bonus issue prohibited; penalties under respective labour laws |
| No Bonus in Lieu of Dividend | Bonus shares cannot replace or substitute dividend payments | Tax disqualification; regulatory action |
| Partly Paid Shares Made Fully Paid | All partly paid shares must be made fully paid before bonus issue | Allotment to partly paid shareholders is voidable |
Companies must obtain an auditor's certificate confirming the availability of free reserves and the absence of statutory defaults before placing the bonus issue proposal before the board. This certificate serves as a compliance safeguard and must be attached with the board resolution minutes.
Valid Sources for Bonus Issue
Section 63(1) specifies three permissible sources from which a company can fund a bonus issue. Understanding which reserves qualify is critical because using an invalid source makes the entire allotment void.
Permitted Sources
- Free Reserves: General reserve, contingency reserve, and the credit balance of the profit and loss account after setting aside statutory obligations. This is the most common source for bonus issues.
- Securities Premium Account: The premium collected on shares issued above face value, maintained under Section 52 of the Companies Act 2013. Using securities premium for bonus issue is a recognized application under Section 52(2).
- Capital Redemption Reserve: Created when redeemable preference shares are redeemed out of profits. This reserve can be applied towards bonus issue of fully paid equity shares under Section 55(2).
Prohibited Sources
- Revaluation Reserves: Gains arising from revaluation of fixed assets cannot fund bonus shares. Section 63(1) explicitly bars this source.
- Share Application Money Pending Allotment: Funds held in the share application account belong to prospective shareholders and cannot be diverted for bonus issue.
- Current Year Unrealized Profits: Only profits that have been transferred to free reserves after statutory appropriations qualify.
Step-by-Step Procedure for Bonus Issue
The bonus issue procedure follows a structured sequence of corporate actions, from the initial board recommendation to the final ROC filing. Each step has specific timelines mandated by the Companies Act 2013.
Step 1: Convene Board Meeting and Pass Board Resolution
The board of directors convenes a meeting to evaluate the bonus issue proposal. The board resolution must specify the bonus ratio (e.g., 1:2, 1:1), the source of funds (free reserves, securities premium, or capital redemption reserve), the proposed record date, and the compliance status of the company. An auditor's certificate confirming reserve availability must be placed before the board. At least 7 days' notice is required for the board meeting under Section 173.
Step 2: Fix the Record Date
The board fixes a record date to determine the shareholders eligible for bonus shares. Only shareholders whose names appear in the Register of Members on the record date receive bonus shares. Listed companies must give at least 7 working days' advance notice to the stock exchange before fixing the record date under SEBI (LODR) Regulations, 2015.
Step 3: Issue Notice for General Meeting
The company issues a notice convening a General Meeting (or initiates postal ballot) with at least 21 clear days' notice to all shareholders. The notice must include an explanatory statement detailing the bonus ratio, source of funds, financial impact, and record date. The notice is sent via registered post, speed post, or electronic mode to all registered shareholders.
Step 4: Pass Ordinary Resolution at General Meeting
Shareholders approve the bonus issue by passing an ordinary resolution at the General Meeting. A simple majority (more than 50% of votes cast by members present in person or by proxy) is sufficient. The resolution can also be passed through postal ballot or e-voting. Minutes of the meeting must be recorded within 30 days under Section 118.
Step 5: Allot Bonus Shares
The board passes an allotment resolution within 15 days of the shareholder approval. The company secretary prepares the allotment statement containing each shareholder's name, number of existing shares, number of bonus shares allotted, and new total holding. The Register of Members is updated immediately after allotment. For DEMAT shares, the company intimates the depository (NSDL/CDSL) for crediting shares to shareholder accounts.
Step 6: File Form PAS-3 with ROC
Within 30 days of the allotment date, the company files Form PAS-3 (Return of Allotment) with the Registrar of Companies through the MCA portal. This is the most critical compliance step after allotment. The form requires details of all allottees, the number and class of shares allotted, consideration (NIL for bonus), and the source of funds.
Step 7: Issue Share Certificates
The company issues share certificates to all bonus share allottees within 2 months of allotment. For shares held in DEMAT form, the depository credits the shares to the respective accounts within 15 days. The company must also update its statutory registers and file any required returns with stock exchanges for listed shares.
Form PAS-3: Filing Requirements and Compliance
Form PAS-3 is the statutory return of allotment that every company must file with the ROC after allotting bonus shares. This form is prescribed under Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
Information Required in Form PAS-3
- Company CIN, name, and registered office address
- Date of board resolution approving allotment
- Date of shareholder approval (ordinary resolution)
- Total number of bonus shares allotted and their face value
- Details of each allottee: name, address, PAN, number of shares
- Class of shares (equity or preference)
- Consideration received (NIL for bonus issue)
- Source of funds: free reserves, securities premium, or capital redemption reserve
Required Attachments
- Certified copy of the ordinary resolution passed at General Meeting
- Board resolution for allotment
- Auditor's certificate confirming reserve availability
- Complete list of allottees with individual shareholding details
- Depository intimation letter (for DEMAT shares)
The filing fee for Form PAS-3 ranges from ₹200 to ₹600 based on the company's authorized capital. Late filing attracts an additional fee of ₹100 per day of delay. The form must be digitally signed by the company secretary or an authorized director.
Tax Implications of Bonus Shares
The Income Tax Act 1961 treats bonus shares differently at the time of receipt and at the time of sale. Understanding this dual treatment is essential for shareholders to plan their tax obligations accurately.
Tax Treatment at Receipt
Bonus shares are not taxable at the time of receipt under Section 56(2)(vii) of the Income Tax Act. Since the shareholder pays nothing for the bonus shares and the company does not distribute any profit, there is no income to tax at the allotment stage.
Tax Treatment on Sale
When a shareholder sells bonus shares, capital gains tax applies based on the holding period. The holding period for bonus shares starts from the date of allotment of the bonus shares, not from the purchase date of the original shares.
| Share Type | Holding Period for LTCG | LTCG Tax Rate | STCG Tax Rate |
|---|---|---|---|
| Listed Equity Shares (with STT) | More than 12 months | 12.5% above ₹1.25 lakh exemption | 20% |
| Unlisted Shares | More than 24 months | 12.5% | Slab rate |
Cost of Acquisition for Bonus Shares
The cost of acquisition is a critical factor in computing capital gains on the sale of bonus shares. The rules differ based on the allotment date:
- Bonus shares allotted on or after 1 April 2001: The cost of acquisition is NIL. The entire sale consideration (minus selling expenses) is treated as capital gain.
- Bonus shares allotted before 1 April 2001: The cost of acquisition is the fair market value (FMV) as on 1 April 2001, as prescribed under Section 55(2)(ac) of the Income Tax Act.
Example: A shareholder receives 500 bonus shares (listed) on 15 June 2024 with a face value of ₹10 each. The shareholder sells all 500 shares on 20 August 2025 at ₹150 per share. Since the holding period exceeds 12 months, the gain qualifies as LTCG. Cost of acquisition = NIL. LTCG = ₹75,000 (500 x ₹150). After the ₹1.25 lakh exemption threshold, no tax is payable on this transaction.
Accounting Treatment of Bonus Issue
The accounting treatment for a bonus issue involves a transfer between equity accounts with zero cash impact. The total shareholders' equity remains unchanged because the company transfers an amount from reserves to share capital.
Journal Entry for Bonus Allotment
The standard journal entry for a bonus issue is:
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Free Reserves / Securities Premium / Capital Redemption Reserve | X | |
| Bonus to Shareholders Account | X | |
| Bonus to Shareholders Account | X | |
| Share Capital Account | X |
Worked Example
A private limited company with paid-up capital of ₹50,00,000 (5,00,000 shares of ₹10 each) and free reserves of ₹30,00,000 declares a 1:5 bonus issue (1 new share for every 5 held).
- New shares allotted: 1,00,000 shares (5,00,000 / 5)
- Amount capitalized: ₹10,00,000 (1,00,000 x ₹10 face value)
- Post-bonus paid-up capital: ₹60,00,000
- Post-bonus free reserves: ₹20,00,000
- Total equity: ₹80,00,000 (unchanged)
The book value per share decreases from ₹16 (₹80,00,000 / 5,00,000 shares) to ₹13.33 (₹80,00,000 / 6,00,000 shares). Each shareholder's percentage ownership remains identical because all receive shares in the same proportion.
Bonus Issue vs Rights Issue vs Stock Split
Shareholders and directors often evaluate bonus issues alongside other corporate actions that affect share capital. Understanding the differences helps in making informed capital structure decisions.
| Parameter | Bonus Issue | Rights Issue | Stock Split |
|---|---|---|---|
| Cost to Shareholder | NIL (free shares) | Discounted price per share | NIL |
| Cash Raised by Company | NIL | Yes (fresh capital) | NIL |
| Impact on Reserves | Reserves decrease | No impact on reserves | No impact on reserves |
| Face Value | Unchanged | Unchanged | Reduced proportionally |
| Paid-Up Capital | Increases | Increases | Unchanged |
| Total Equity | Unchanged | Increases | Unchanged |
| Governing Section | Section 63 | Section 62 | Section 61 |
| Shareholder Approval | Ordinary Resolution | Special Resolution | Ordinary Resolution |
Common Compliance Pitfalls and How to Avoid Them
Companies frequently encounter compliance issues during the bonus issue process. Directors and company secretaries must be aware of these risks to prevent regulatory penalties and voided allotments.
| Pitfall | Consequence | Prevention |
|---|---|---|
| Issuing bonus without AoA authorization | Allotment declared void by NCLT | Review and amend AoA before initiating the bonus process |
| Using revaluation reserves as source | Allotment void; regulatory penalties on directors | Use only free reserves, securities premium, or capital redemption reserve |
| Outstanding default on statutory dues | Bonus issue prohibited; NCLT intervention | Clear all defaults before board resolution; obtain auditor certificate |
| Allotment to partly paid shareholders | Allotment voidable at shareholder's option | Issue notice to partly paid shareholders; ensure full payment before record date |
| Late filing of Form PAS-3 | ₹100 per day additional fee; prosecution risk | File within 30 days of allotment; set internal compliance reminders |
| Bonus shares issued in lieu of dividend | Violation of Section 63(3); shareholder suits | Declare bonus and dividend as independent corporate actions |
Directors who authorize a bonus issue without verifying compliance with Section 63 conditions face personal liability under Section 447 (fraud) and Section 448 (false statements). The penalty includes imprisonment up to 6 months and fines up to ₹1,00,000. Always obtain a written auditor certificate and legal opinion before proceeding.
SEBI Regulations for Listed Companies
Listed companies must comply with additional requirements under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, beyond the Companies Act provisions.
- Prior Intimation: Inform BSE and NSE at least 2 working days before the board meeting where bonus issue is proposed (Regulation 29)
- Outcome Disclosure: Disclose the board resolution outcome within 30 minutes of the meeting conclusion (Regulation 30)
- Record Date Notice: Give at least 7 working days' advance notice to stock exchanges before the record date
- Allotment within 15 Days: Complete allotment within 15 days from the date of shareholder approval (Regulation 42)
- Corporate Action: File the corporate action details with depositories (NSDL and CDSL) for automatic credit of bonus shares to DEMAT accounts
- Trading Permission: Apply for trading permission for the newly allotted bonus shares from both BSE and NSE
Non-compliance with SEBI regulations attracts penalties up to ₹25 crore or 3 times the profit made from the violation, whichever is higher, under Section 15HB of the SEBI Act, 1992.
Bonus Issue Compliance Checklist
Use this checklist to track every compliance requirement from initiation to completion of the bonus issue process. A virtual CFO can help manage these timelines and filings for your company.
Pre-Approval Phase
- Review Articles of Association: Confirm AoA authorizes bonus issue; if not, pass special resolution to amend
- Auditor Certification: Obtain written certificate confirming free reserve availability and absence of statutory defaults
- Verify No Defaults: Confirm zero defaults on fixed deposits, debentures, PF, gratuity, and employee bonuses
- Partly Paid Shares: Issue notice to partly paid shareholders to make shares fully paid before record date
- Board Resolution: Pass board resolution recommending bonus issue with ratio, source, and record date
Approval and Allotment Phase
- General Meeting Notice: Issue 21 clear days' notice with explanatory statement to all shareholders
- Ordinary Resolution: Pass at General Meeting, postal ballot, or e-voting with simple majority
- Record Date: Determine eligible shareholders based on Register of Members on record date
- Allotment Resolution: Board passes allotment resolution within 15 days of shareholder approval
- Update Register of Members: Record all new shareholdings immediately after allotment
Post-Allotment Phase
- Form PAS-3: File with ROC within 30 days of allotment through MCA portal
- Share Certificates: Issue within 2 months of allotment or credit DEMAT accounts within 15 days
- Stock Exchange Filings: File corporate action with BSE/NSE and apply for trading permission (listed companies)
- Shareholder Communication: Send allotment letters and updated shareholding statements to all members
