A bonus issue is a method by which a company issues additional shares to its existing shareholders without any consideration. It involves capitalising the company’s free reserves, securities premium, or capital redemption reserve account, thereby converting undistributed profits into paid-up share capital.
For example, if A Limited declares a 1:1 bonus issue, a shareholder holding one share will receive an additional share free of cost. This increases the company’s paid-up capital while maintaining proportional ownership.
Why Are Bonus Shares Issued?
Listed companies issue bonus shares for several strategic and financial reasons:
- To Balance Paid-Up Capital and Reserves Ratio
Over time, a company may accumulate substantial reserves relative to its paid-up capital. For instance, A Limited had a small paid-up capital compared to its huge reserves, creating an imbalanced capital structure. Such a situation may signal to investors and regulators that the company retains profits without adequately rewarding shareholders. Bonus shares convert reserves into capital, restoring balance and improving investor perception. - To Improve Market Liquidity and Affordability
High stock prices can limit retail investor participation. Bonus shares increase the number of shares in circulation, reduce the post-issue market price per share, and enhance liquidity without affecting overall market valuation. - To Signal Confidence and Reward Shareholders
Issuing bonus shares demonstrates management’s confidence in sustainable future profits. It also rewards long-term shareholders, strengthening loyalty and trust in the company.
Capitalisation of Profits or Reserves
Under Section 63 of the Companies Act, 2013, bonus shares must be issued only from:
Free reserves
Securities premium account
Capital redemption reserve account
They cannot be issued from:
Revaluation reserves
Capital reserves arising from unrealised gains
Notional profits or revalued assets
In A Limited’s case, the company capitalised part of its free reserves and securities premium account to fund the bonus issue.
Legal Framework
The issuance of bonus shares is governed by:
Section 63 of the Companies Act, 2013 — Conditions for issue of fully paid-up bonus shares.
Chapter XI, SEBI (ICDR) Regulations, 2018 (Regulations 293–295) — Eligibility, restrictions, and timelines.
SEBI (LODR) Regulations, 2015 — Disclosure and reporting requirements to the stock exchange.
Procedural Aspect — A Limited Case Study
The issuance of bonus shares by A Limited follows a structured and compliant procedure, ensuring transparency and adherence to statutory and regulatory requirements:
Management Decision
The proposal for a bonus issue originates from the Managing Director, CFO, and other key managerial personnel. The management may also seek independent professional advice to assess technical feasibility, accounting implications, and compliance requirements.Prior Intimation to Stock Exchange
A Limited provides prior intimation to the Stock Exchange regarding the upcoming Board meeting where the bonus issue will be considered, in compliance with Regulation 29 of SEBI (LODR) Regulations, 2015.Audit Committee Review
The proposal is placed before the Audit Committee to verify the sufficiency of reserves and eligibility for issuing bonus shares.Board Approval
Upon recommendation by the Audit Committee, the Board approves the bonus issue, including the bonus ratio, and authorises the draft of the Postal Ballot notice.Intimation of Board Outcome to Stock Exchange
The outcome of the Board meeting, including details of the proposed bonus issue, is intimated to the Stock Exchange under Regulation 30 of SEBI (LODR) Regulations, 2015.In-Principle Approval from Stock Exchange
A Limited applies for in-principle approval from the Stock Exchange within five days of Board approval, as mandated under Regulation 28 of SEBI (LODR) Regulations, 2015.Dispatch of Postal Ballot Notice
A Postal Ballot notice, along with the explanatory statement, is sent to all shareholders to obtain their approval for the bonus issue. This step is carried out under Section 110 of the Companies Act, 2013, read with Rule 22 of the Companies (Management and Administration) Rules, 2014.Intimation of Dispatch to Stock Exchange
The company informs the Stock Exchange regarding the dispatch of the Postal Ballot notice, as required under Regulation 30 of SEBI (LODR) Regulations, 2015.Newspaper Advertisement
For wider public information and transparency, the Postal Ballot notice is published in newspapers, in compliance with Rule 22(3) of the Companies (Management and Administration) Rules, 2014.E-Voting Period
Shareholders are provided 30 days from the date of dispatch of the Postal Ballot notice to cast their votes electronically, as stipulated under Section 108 and 110 of the Companies Act, 2013.Declaration of Results
After the e-voting period ends, the scrutiniser prepares and submits a report detailing the voting results. The results are intimated to the Stock Exchange within 48 hours in accordance with Regulation 44 of SEBI (LODR) Regulations, 2015.Record Date Intimation
The Board fixes the record date to identify shareholders eligible to receive the bonus shares, and the intimation is sent to the Stock Exchange under Regulation 42 of SEBI (LODR) Regulations, 2015.Allotment of Bonus Shares
Finally, the bonus shares are allotted to eligible shareholders within two months from the date of Board approval and intimated to Stock Exchange as per Regulation 30 of SEBI (LODR) Regulations, 2015.
Throughout this process, the Company Secretary ensures seamless compliance by coordinating meetings, drafting notices, managing Stock Exchange intimations, arranging newspaper publications, and maintaining and handling all the procedural part and manitaining the statutory records.
6. Conclusion
The issuance of bonus shares by A Limited exemplifies a strategic and compliant approach to corporate finance. Beyond rewarding shareholders, it balances the capital-reserves ratio, enhances market liquidity, signals management confidence, and reflects good governance.
A bonus issue is thus a powerful tool for companies to communicate transparency, financial prudence, and commitment to shareholder value while maintaining regulatory compliance.
Disclaimer:
This article is limited in scope and may omit certain procedural nuances, interpretations, or exceptional cases that can vary depending on company-specific circumstances, regulatory updates, or stock exchange clarifications. Readers are advised to refer to the original provisions, circulars, and professional guidance before applying this in practice.