When a company is prosperous and accumulates large distributable profits, it converts these accumulated profits into capital and divides the capital among the existing members in proportion to their entitlements. Members do not have to pay any amount for such shares. A company may, if its Articles provide, capitalize its profits by issuing fully-paid bonus shares. The issue of bonus shares by a company is a common feature. They are given free. The bonus shares allotted to the members do not represent taxable income in their hands. The issue of bonus shares is bare machinery for capitalizing undistributed profits. The vesting of rights in bonus shares takes place when the shares are allotted and not from any earlier date.

Procedure for issue of Bonus share

  • Check whether the Article of Association (AOA) of the company authorizes the issue of bonus share. If not, the named the Articles of Association (AOA) of the company by passing the Special Resolution.
  • Check whether the Bonus issue increases authorized capital. If so, make necessary alterations in the Memorandum/Articles of Association by passing a special Resolution.
  • In the case of a listed entity, give prior intimation to the stock exchange at least 2 working days in advance of the date of Board Meeting excluding the date of intimation and the date of the meeting.
  • Hold the Board Meeting and get the following proposal to be approved by the Board:
    1. To recommend the bonus issue;
    2. To approve the resolution to be passed at a general meeting;
      • To authorize the Bonus issue
      • To approve the requisite resolution for the increase of the capital and consequential alteration of Memorandum of Association/Articles of Association.
      • To enable the Articles to authorize the issue, if necessary.
  • Ensure that bonus issues have been made out of free reserves built out of the genuine profits or securities premium or capital redemption reserve account.
  • Ensure that reserves created by revaluation of assets are not capitalized.
  • Ensure that the company has not defaulted in payment of interest or principal in respect of fixed deposits and or debt securities issued by it or in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity, bonus, etc.
  • Ensure that the bonus issue is not made in lieu of dividends.
  • The company which has once announced the decision of its Board recommending a bonus issue shall not subsequently withdraw the same.
  • If there are any partly paid-up shares, ensure that these are made fully paid-up before the bonus issue is recommended by the Board of directors.
  • The company shall hold the general meeting and get the resolution for the issue of bonus shares passed by the members.
  • Once Special Resolution is passed file Form MGT-14 along with the fees with the Registrar within 30 days of passing of the resolution along with the altered article of association.
  • Within 30 days of allotment file with the registrar the Return of allotment in Form PAS-3 along with a fee.
  • Share certificates shall be delivered to the shareholders within 2 months from the date of allotment of bonus. In the case of a Specified IFSC public and a private company, the share certificates shall be delivered within 60 days of allotment.
  • Intimate the details of allotment of shares to the Depository immediately on allotment of such shares.

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