Companies have multiple methods at their disposal for the issue of shares. Further, one may think that distributing dividends is the only way to distribute profits. But there’s one method that allows the company to issue new shares as well as distribute its profits to its shareholders. This is known as the bonus issue of shares. It allows the company to increase its number of shares and share capital by transferring the amount from the reserves of the company. What is the bonus issue of shares and how does it work? Let’s find out!
As the name suggests, the bonus issue of shares is essentially the issue of equity shares to the existing shareholders at large. It is also known as the capitalization of reserves. This is because whenever a company goes for a bonus issue, the reserves are capitalized and converted into the share capital of the company. A bonus issue is a kind of reward for the existing shareholders who do not have to pay any consideration against bonus shares.
Section 63 of the Companies Act, 2013 lays down broad provisions for the bonus issue of shares by the companies. Both public and private limited companies are entitled to issue bonus shares to their shareholders. Let’s understand the legal requirements for issuing bonus shares in India.
A company is authorized to issue fully paid-up bonus shares to its members out of the following reserves of the company:
However, companies cannot issue bonus shares by the capitalization of the revaluation reserves i.e., reserves created by the revaluation of assets.
If a company is willing to go for a bonus issue, then it needs to satisfy certain conditions for the bonus issue of shares. This includes the following:
After the bonus issue of shares happens, there are certain notable changes in relation to the share capital and reserves of the company. As the company does not receive any consideration (money) from the shareholders against this bonus issue, this issue has to be adjusted against reserves. Thus, it can be said that bonus issues are nothing but the distribution of reserves (or profits) to the shareholders of the company in the form of shares. However, while the bonus issue increases the number of shares, it decreases the market price of each share.
In a Nutshell
The bonus issue is profitable to both the companies and the shareholders. It allows the company to preserve its liquid resources like cash that otherwise would have been distributed in the form of dividends to the shareholders. Further, it reduces the gap between the share capital and the assets employed by the company. The shareholding of the shareholders increases. It also increases the future dividend payments that the shareholders receive due to an increase in the number of shares. If you need any assistance in relation to the bonus issue, feel free to contact the ASC Group.
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