The issue of bonus shares is a corporate action wherein a company distributes additional shares to its existing shareholders without receiving any additional payment. Bonus shares are issued in proportion to the existing shareholding, and they are typically allotted to shareholders free of charge. The issuance of bonus shares is governed by the Companies Act, 2013, in India, and companies need to comply with specific regulations and procedures.
Key Steps and Requirements for Issuing Bonus Shares:
1. Authorization in Articles of Association:
The company’s Articles of Association must authorize the issuance of bonus shares. If the Articles do not authorize the issuance of bonus shares, they may need to be amended through a special resolution.
2. Approval by Board of Directors:
The decision to issue bonus shares must be approved by the board of directors. The board meeting should discuss and pass a resolution authorizing the issuance of bonus shares.
3. Recommendation to Shareholders:
The board’s recommendation for issuing bonus shares must be communicated to the shareholders. A notice convening an Extraordinary General Meeting (EGM) or Annual General Meeting (AGM) should include the proposal for issuing bonus shares.
4. Approval by Shareholders:
Shareholders’ approval is required for the issuance of bonus shares, typically through a special resolution. Shareholders discuss and vote on the proposal during the EGM or AGM. A special resolution is passed if the required majority approves.
5. Capitalization of Reserves:
Bonus shares are typically issued by capitalizing the company’s free reserves. The company transfers a portion of its reserves to the share capital account, creating new shares that are then distributed as bonus shares.
6. Payment of Dividend in Bonus Shares:
The company may decide to issue bonus shares in lieu of a cash dividend. Shareholders receive additional shares instead of cash dividends, enhancing their shareholding.
7. Credit to Demat Accounts:
Bonus shares are credited to the demat accounts of shareholders. The company coordinates with the depositories to credit the bonus shares to the demat accounts of eligible shareholders.
8. Intimation to Stock Exchanges:
The company must inform the stock exchanges where its shares are listed about the bonus issue. The company submits the necessary documentation and information to the stock exchanges as per listing regulations.
9. Record Date and Ex-Date:
A record date is fixed to determine shareholders eligible for bonus shares, and an ex-date is set. The record date is announced, and shares are traded ex-bonus from the ex-date onwards.
10. Post-Allotment Compliance:
The company must comply with post-allotment procedures, including filing necessary forms with regulatory authorities. The company completes formalities such as filing Form PAS-3 with the Registrar of Companies (RoC) within 30 days of allotment.
Benefits of Issuing Bonus Shares:
- Enhanced Liquidity: Bonus shares increase the number of outstanding shares, enhancing liquidity in the market.
- Capitalization of Reserves: Bonus shares are often issued by capitalizing free reserves, demonstrating the company’s ability to reward shareholders without affecting cash reserves.
- Shareholder Value: Bonus shares increase the number of shares held by existing shareholders, potentially increasing their overall value.
- Attractiveness to Investors: The issuance of bonus shares may make the company’s shares more attractive to investors.
Conclusion:
The issuance of bonus shares is a strategy employed by companies to reward existing shareholders and signal financial strength. While the Companies Act, 2013, outlines the general procedures, companies must also adhere to the rules and regulations of stock exchanges and regulatory authorities. The decision to issue bonus shares is influenced by the company’s financial health, strategic objectives, and the desire to enhance shareholder value.
