Issue of bonus shares in india

Prof. M. C. Sharma 1

Issue of Bonus Shares in India

M. C. SharmaAssociate Professor

Department of CommerceShaheed Bhagat Singh Evening College

(University of Delhi), Delhi, INDIA

Bonus Shares• Bonus shares are issued to the existing

shareholders out of the accumulated profits and

reserves.

• Bonus Shares are always fully paid.

• Right to renunciation is not available in respect of

bonus shares.

• It is also called capitalisation of profits.Prof. M. C. Sharma 2

Issue of Bonus Shares - Sources

According to Section 63 (1) of the Companies Act

2013, a company may issue fully paid bonus

shares to its members out of:– Its free reserves– The Securities Premium A/c– The Capital Redemption Reserve (CRR)

Bonus shares cannot be issued out of revaluation reserve.


Sources for issuing fully paid Bonus Shares

a) The Securities Premium A/c

b) The Capital Redemption Reserve (CRR)

c) Surplus or Profit (unappropriated part)

d) Any type of revenue reserve

e) Development Rebate Reserve

f) Investment Allowance Reserve

g) Debenture Redemption Reserve and so on.


Sources for making partly paid shares as fully paid

a) Surplus or Profit (unappropriated part)

b) Any type of revenue reserve

c) Development Rebate Reserve

d) Investment Allowance Reserve

e) Debenture Redemption Reserve and so on.


Conditions for Issue of Bonus Shares

a) It is authorised by its article.b) On the recommendation of the Board of directors,

approved by the members in general meeting of the company.

c) The company has not defaulted in the payment of interest or principal in respect of FD or debt securities.

d) The company has not defaulted in the payment of statutory dues of the employees, such as PF, gratuity, etc.

e) The partly paid shares, if any, outstanding at the time of allotment, must be made fully paid.


Objectives of Bonus Issue

a) Expanding the capital base

b) To retain the cash

c) Adds to the reputation or goodwill

d) Leads to more trading and liquidity

e) The paid up capital reflects the actual capital employed

by the company.


Advantages of Bonus Issue – to the Company

a) Retains the cash for business

b) Capital structure becomes more realistic

c) Adds to the reputation or goodwill

d) More security to the creditors

e) Reduces high rate of dividend

f) Reduces the chances of any takeover bid


Advantages of Bonus Issue – to the Shareholders

a) Number of shares increases

b) Capital gain by selling shares

c) Get back their accumulated profits

d) More security to the creditors

e) Bonus shares cannot be treated as dividend


Disadvantages of Bonus Issue

a) Number of shares increases, so EPS decreases

b) Subject to approval of SEBI

c) Promotes speculation in the shares of the company

d) May adversely affect future investors


Distinction b/w Bonus Shares and Rights Shares

Sl No. Basis Rights Shares Bonus Shares

1. Price Yes No

2. Partly paid May be No

3. Minimum Subscription Yes (90% of the issue) No

4. Separate bank Account Yes No

5. Renunciation of shares Yes No

6. Purpose To raise the funds Capitalisation of

profits

7. Cash Bring cash No

8. Provision in the artcles No YesProf. M. C. Sharma 11

Journal Entries for Issue of Bonus Shares (Contd.)


1. When Bonus to shareholders is declared

Capital Redemption Reserve A/c

Securities Premium A/c

General Reserve A/c

Surplus OR Divisible Profits A/c

To Bonus to Shareholders A/c

Dr.

Dr.

Dr.

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2. For issue of fully paid bonus shares

Bonus to Shareholders A/c

To Equity Share Capital A/c

Dr.

Journal Entries for Issue of Bonus Shares


3. When Bonus to shareholders is used to make existing partly

paid shares as fully paid up:

(a) For making final call due

Equity Share Final Call A/c

To Equity Share Capital A/c

Dr.

(b) For adjusting bonus to shareholders against

final call due:

Bonus to Shareholders A/c

To Equity Share Final Call A/c

Dr.

Issue of bonus shares in india

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