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Capitalisation of Profits by Issue of Bonus Shares

Capitalisation of  Profits by Issue of Bonus Shares

Issue of bonus shares by the capitalisation of profits or reserves Proviso to section 205(3) stipulates that profits or reserves of a company may be capitalised by issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company.

Provisions of Table A in respect of issuance of bonus shares:

A company cannot issue bonus shares, unless it is authorised by its articles, therefore, the articles of a company must contain provisions for authorisation for issue of bonus shares. In absence of such authorisation, articles will have to be altered by applying the procedure laid down under section 31 of the Act. Regulations contained in Table A of the Act apply to a public company limited by shares to the extent they are not inconsistent with the articles of that company. Section 28(2) says that the regulations contained in Table A shall apply to a company limited by shares, insofar as the Articles of the concerned company do not exclude or modify them.

Regulation numbers 96 and 97 deal with capitalisation of profits by issuance of bonus shares.

These are reproduced hereunder:

Regulation No. 96:—

(1)        The company in general meeting may, upon the recommendation of the Board, resolve—

(a) that it is desirable to capitalise any part of the amount for the time being standing to the credit of any of the company's reserve accounts, or to the credit of the profit and loss account, or otherwise available for distribution; and

(b) that such sum be accordingly set free for distribution in the manner specified in clause (2) amongst the members who would have been entitled thereto, if distributed by way of dividend and in the same proportions.

(2)        The sum aforesaid shall not be paid in cash but shall be applied, subject to the provision contained in clause (3), either in or towards—

(i) paying up any amounts for the time being unpaid on any shares held by such members respectively;

(ii) paying up in full, unissued shares of the company to be allotted and distributed, credited as fully paid up, to and amongst such members in the proportions aforesaid; or

(iii) partly in the way specified in sub-clause (i) and partly in that specified in sub clause

(3)        A share premium account and a capital redemption reserve account may, for the purposes of this regulation, only be applied in the paying up of unissued shares to be issued to members of the company as fully paid bonus shares.

(4)        The Board shall give effect to the resolution passed by the company in pursuance of this regulation.

Regulation No. 97:

(1)        Whenever such a resolution as aforesaid shall have been passed, the Board shall—

(a) make all appropriations and applications of the undivided profits resolved to be capitalised thereby, and all allotments and issues of fully paid shares, if any; and

(b) generally do all acts and things required to give effect thereto.

(2)        The Board shall have full power—

(a) to make such provision, by the issue of fractional certificates or by payment in cash or otherwise as it thinks fit, for the case of shares or debentures becoming distributable in fractions; and also

(b) to authorise any person to enter, on behalf of all the members entitled thereto, into an agreement with the company providing for the allotment to them respectively, credited as fully paid up, of any further shares to which they may be entitled upon such capitalisation, or (as the case may require) for the payment by the company on their behalf, by the application thereto of their respective proportions of the profits Resolve  to be capitalised, of the amounts or any part of the amounts remaining unpaid on their existing shares.

(3)    Any agreement made under such authority shall be effective and binding on all such members.

Factors affecting issue of bonus shares

A company has to consider many important factors before taking of decision for issuance of bonus shares. A list of such factors are given below:—

(i) quantum of free reserves built out of genuine profits including share premium collected in cash only;

(ii) present authorised and paid up share capital;

(iii) present equity share capital base in relation to   earnings of the company;

(iv) quantum of earnings of the company in last two or three years;

(v) return on equity capital after deduction of tax and preference dividend, if any;

(vi) projected earnings of the company in next two or three years;

(vii) company's capacity to maintain earnings on the expanded capital after issuance of bonus shares;

(viii) tax benefits;

(ix) government policies;

(x) trends in capital markets;

(xi) present share price and estimated price of the company's shares after issuance of bonus shares.

Provisions contained in the Companies Act, 1956

The Companies Act, 1956 does not contain a separate set of sections dealing with bonus shares. The Act though has made references to bonus issue/shares in its certain sections. Reference may be made to section 205 of the Companies Act, 1956, which provides that dividend could only be paid out of profits. The proviso to subsection (3) of section 205 permits capitalisation of profits or reserve of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company. Clearly, the Companies Act specifically permits utilisation of reserve arising out of revaluation of assets for purpose of issuing fully paid up bonus shares. By issue of bonus shares value of shares is likely to reduce proportionately, i.e., in the ratio number of bonus shares bears to increased number of shares after bonus issue. [Chandrakant Mulraj v Tata Engg. & Locomotive Co. Ltd. (1985) 58 Comp Cas 320 (Bom)]. Bonus shares are capital in hands of shareholders and not dividend; bonus shares do not give them an immediate right to a larger amount of the existing assets but simply confer a title to a larger proportion of the surplus assets in the event of winding up. [IRC v Blott (1921) 2 AC 171 (HL)]. Bonus may also be issued from the reserves created out of revaluation of capital assets The Supreme Court held in case of Bhagwati Developers v Peerless General Finance & Investment Co. Ltd and Others (2005) 62 SCL 574 (SC) decided on 9 th August, 2005 that proviso of section 205(3) permits capitalisation of profit or reserves of a company for the purpose of issuance of fully paid up shares. However, the shares issued by way of capitalisation of revaluation reserves will not be considered for promoters contribution under the SEBI guidelines.

The paid up share capital after bonus issue must be within the authorized share capital of the company, otherwise authorised share capital of the company shall have to be increased at first place and then the company can go in for a bonus issue. In the case of the allotment of bonus shares, a return of allotment shall be filed electronically in the prescribed e-Form 2 enclosing with the resolution of the Board of director authorising the issuance of bonus shares along with the requisite filing fee as per Schedule X to the Companies Act, 1956 within a period of thirty days after the date of allotment. Such return shall state the number and nominal amount of shares comprised in such allotment and the names, addresses and occupations of the allottees. [Section 75(1)(c)(i)]

Comments
 Girish Paralikar July 28, 2010
If the Bonus shares are issued out of revaluation reserves and for some reason, if the value of the assets gets reduced, then what will be the position of the Bonus shares so allotted. Although the Act is silent on this, we should take it in its spirit and not by letters and hence, Bonus out of revaluation reserves should not be resorted.
 vallari rastogi March 4, 2011
is there any restriction on the amount that can be capitalised for bonus issue?
also if the company has never paid any dividend then it can issue bonus shares out of profit?
 nitin bhatia August 17, 2011
a unlisted co. can issue bonus share out of revaluation reserve but it cannot be consider while calculating the minimum promoters contribution.
 Anil Aggarwal November 1, 2011
Should there be any time gap between issue of two bonus issues by a private limited company
 amit kumar December 26, 2011
a public ltd but unlisted company has never paid any dividend having huge reserve created out of profit. from this researve company can issue bonues share
 Hanna P Nazir April 5, 2012
Is there any restriction on the amount that can be capitalised for bonus issue?
JYOTHI SWAROOPA February 27, 2013
Calrify my query
ssbhat July 31, 2013
if there is any quontum restrictions for bonus shares by a private co.
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