Bonus Shares – Meaning and Legal Basis
Bonus shares refer to shares issued by a company to its existing shareholders free of cost, in proportion to the shares already held by them. These shares are issued out of the company’s accumulated profits or reserves and not from fresh capital. Under Indian company law, the issuance of bonus shares is governed by Section 63 of the Companies Act, 2013, read with the Companies (Share Capital and Debentures) Rules, 2014. The purpose of issuing bonus shares is to capitalize the company’s reserves and reflect the true value of shareholders’ investment. Bonus shares do not involve any cash inflow or outflow for shareholders or the company. They merely convert free reserves into share capital. This mechanism helps companies reward shareholders without affecting liquidity and also increases the number of outstanding shares while keeping the ownership structure proportionate and intact.
Conditions and Procedure for Issue of Bonus Shares
The issue of bonus shares is subject to strict statutory conditions laid down under Section 63 of the Companies Act, 2013. Firstly, bonus shares can be issued only out of free reserves, securities premium account, or capital redemption reserve, and not from revaluation reserves. Secondly, the company’s Articles of Association must authorize the issue of bonus shares; if not, the Articles must be altered before issuance. Thirdly, the company should not have defaulted in payment of interest or principal on fixed deposits or debt securities. Additionally, all partly paid-up shares must be made fully paid before issuing bonus shares. The Board of Directors must approve the bonus issue, followed by shareholders’ approval where required. These safeguards ensure financial discipline and protect the interests of creditors and investors while maintaining corporate transparency.
Legal Effects and Importance of Bonus Shares
Bonus shares have important legal and financial implications. Although they increase the paid-up share capital of the company, they do not alter the overall value of shareholders’ holdings. Shareholders receive additional shares, but the market price per share usually adjusts accordingly. Bonus shares enhance investor confidence and signal strong financial health and retained earnings of the company. From a legal perspective, bonus shares strengthen the company’s capital base without raising external funds. They also help improve share liquidity and market participation. Courts have recognized bonus shares as a legitimate corporate action when issued in compliance with statutory provisions. However, shareholders cannot demand bonus shares as a matter of right; issuance is purely discretionary and subject to compliance with Section 63 of the Companies Act, 2013.
Realtime Example
A well-known listed company declares a 1:1 bonus issue, meaning one bonus share for every existing share held. A shareholder holding 100 shares will receive 100 additional shares free of cost. The company uses its accumulated profits from previous years to issue these shares, after ensuring compliance with Section 63 of the Companies Act, 2013. No cash payment is made by the shareholder, and the ownership percentage remains unchanged. This real-time example demonstrates how bonus shares reward long-term investors while strengthening the company’s capital structure.
Mnemonic to Remember Bonus Shares
A simple mnemonic to remember the concept of bonus shares is “FREE CAP”:
F – Free of cost shares
R – Reserves used
E – Existing shareholders only
E – Equal proportion
C – Capitalization of profits
A – Articles must permit
P – Provisions of Section 63
This mnemonic helps law students recall the essential features, legal conditions, and statutory basis of bonus shares during examinations with clarity and confidence.
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