A Bonus Issue by a company refers to the further issue of shares to its’ existing shareholders, without consideration, in proportion to the voting rights or pro-rata of their holding of shares in the company.
Source for Issue of Bonus Shares:
As per Section- 63(1) a company may issue fully paid up bonus shares to its members out of following:
- Free Reserves;
- Securities Premium Account; or
- Capital Redemption Reserve Account
No bonus shares can be issued by capitalizing reserves created by the revaluation of assets.
Provision in Articles of Association
Issue of bonus share should be authorised by article of association of the Company. However if the company has adopted the Table F, then by relaying on regulation 39 and 40, the company can issue the bonus shares. In case the company has not adopted the table F and there is no specific provision in its articles then, it should amend its articles before issuing the bonus shares.
Restriction on Listed Companies
To issue bonus shares the listed companies are required to comply with certain conditions and restrictions as imposed by SEBI through various regulations. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 imposed the following additional restrictions:
- The listed company should reserve portion of bonus shares to the outstanding compulsorily convertible debt instruments in proportion to their convertibility.
- The said reserved portion of bonus shares should be issued at time of conversion on the same terms or same proportions at which the bonus shares were issued;
- The bonus shares should be issued out of free reserves created out genuine profits or securities premium collected in cash. As restricted by the section, these regulations also prohibit issue of bonus shares from reserves created by revaluation of fixed assets.
- Bonus shares shall not be issued in lieu of dividends;
- Bonus issue on the SR equity shares shall carry the same ratio of voting rights compared to ordinary shares and the SR equity shares issued in a bonus issue shall also be converted to equity shares having voting rights same as that of ordinary equity shares along with existing SR equity shares.
Completion of a bonus issue in case where:
- Shareholders’ approval not required: Bonus issue shall be implemented within 15 days from the date of board approval for bonus issue, where shareholders approval is not required for capitalisation of profits or reserves for making the bonus issue;
- Shareholders’ approval is required: Bonus issue shall be implemented within 2 months from the date of board meeting wherein the decision to announce the bonus issue was taken subject to shareholders’ approval
Implementation of bonus issue
The date of commencement of trading shall be considered as ‘implemented’ for the purpose of bonus issue.
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
As per Regulation 29 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the listed company needs to give prior notice to Stock Exchanges about the Board Meeting where the proposal for issue of Bonus shares is part of the Agenda.
Further, as per Regulation 42, the listed entity needs to intimate the record date of issue of Bonus shares to the Stock Exchanges, at least 7 working days in advance of record date.
A bonus share issue is most commonly not taxed as a dividend, even if it is charged to retained earnings. Bonus shares, are not to be taxed on the allotment, but on sale. As decided in Sudhir Menon HUF Vs. ACIT 162 TTT 425 ( Mumbai ), Section 56 (2) (vii) of Income Tax Act, 1961 does not apply to the issue of Bonus shares because there is a mere capitalization of profits by the issuing company and there is neither an increase or decrease in the wealth of the shareholder nor any change in the percentage shareholding. There was no receipt of any property by the shareholder and what stood received by the shareholder was the split shares out of its own holdings. Thus, the cost of acquisition of shares to the investor in ‘Nil”. Bonus shares would be subject to capital gain tax depending on the holding period only when sold.
Reporting under Foreign Exchange Management Act, 1999 (‘FEMA’) on issue of bonus shares
As per Master Direction no. 18/2015-16 (RBI/FED/2015-16/13) dated January 1, 2016 issued by RBI, the following form is required to be submitted under FEMA:-
Filing of form FC-GPR: Indian company issuing capital instruments to a person resident outside India, and where such issue is reckoned as Foreign Direct Investment under FEMA 20(R), shall report such issue in Form FC-GPR in the Single Master Form not later than thirty days from the date of issue of the capital instruments
Section 63 (i.e. Bonus issue) of the Companies Act, 2013, does not prescribe any penal provision for contravention of the said section. However section 450 of the Companies Act, 2013 will be applicable. Accordingly, the punishment for contravention, the company and every offer of the company who is in default shall be punishable with a fine upto Rs.10,000, if the contravention continues then the fine shall be Rs. 1,000 every day after the first during which the contravention continues.
This Article has been Compiled by Swati Garg (Senior Associate)
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