A bonus issue is a capitalisation of reserves, through which a company issues fully paid-up bonus shares to its members without any fresh consideration. Section 63 governs the issue, and the source of the capitalisation is the central constraint.
The Permitted Sources
Section 63(1) permits a bonus issue out of free reserves, the securities premium account or the capital redemption reserve. The shares must be fully paid-up. A company cannot issue bonus shares out of reserves created by the revaluation of assets; the prohibition is absolute. The rationale is that a revaluation reserve is not a realised profit and cannot be capitalised as if it were distributable.
The Approval Sequence
The bonus issue is approved by the board, which recommends the ratio and the capitalisation. The articles must authorise the capitalisation; if they do not, the articles are altered by special resolution. The shareholders’ approval is obtained by ordinary resolution where the articles or the Act require it. The issue must be implemented within the prescribed time from the board’s approval, and the company cannot subsequently change its mind to the prejudice of the members.
The Partly Paid Prohibition
A company cannot issue bonus shares in lieu of dividend, and it cannot issue bonus shares unless the partly paid shares, if any, have been made fully paid-up. The prohibition is designed to prevent the capitalisation of reserves while the existing shares remain partly paid.
The Filing
The bonus issue requires the PAS-3 return of allotment within 30 days. The company should also update the register of members and the share certificates. The capitalisation reduces the free reserves and increases the paid-up capital; the balance sheet should reflect the transfer.
Call to Action: We advise companies on bonus-issue structuring, reserve verification and the revaluation-reserve prohibition. For a bonus-issue review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.