Provisions relating to
Issue of Bonus Shares
B.Com 2nd and 4th Sem CBCS Pattern
Corporate Accounting Notes
The undistributed profits, after the
necessary provisions for taxation, are the property of the equity shareholders
and the same may be used by the company for distribution as dividends to them.
But the sound financial policy demands that some of the profits at least must
be ploughed back into the business. Thus when a company has accumulated
substantial amount of past profits as might be found in the credit of capital
reserves, revenue or general reserve of profit and loss account; it is
desirable to bring the amount of issued share capital closer to the actual
capital employed as represented by the net assets (Assets – Liabilities) of the
company. This would reflect the true amount of capital invested by the shareholders
in the company.
For example, the capital, which the
shareholders have contributed for shares, is clearly visible since this was
contributed in cash. But the capital, which they have contributed in the form
of accumulated profits, remains unknown because this was not a direct
contribution in cash.
In order to rectify these, accumulated
profits in full or in part are capitalized, that is, accumulated profits are
converted into shares. Shares are distributed free of charge and therefore are
known as Bonus Shares, which are given to existing shareholders pro rata to
their holdings. It may be added the bonus shares may be issued to make up the
existing partly paid shares as fully paid.
Object
behind the issue of bonus shares:
a)
Company’s cash resources may not be sufficient to pay
dividend in cash.
b)
Company wants to build up cash resources for expansion or
for repayment of a liability.
c)
Company may want to bring its paid up capital more in line
with the capital resources employed in the business.
d)
It may be required to with a view to bringing down the rate
of dividend though not the quantum of dividend on the issued capital of the
company.
SEBI GUIDELINES on the issue of
bonus shares
There
are no guidelines for issuing bonus shares by the private companies or unlisted
public companies have been issued by the SEBI. However,
the listed public companies for issuing bonus shares to the shareholders must
comply with the guidelines issued by the SEBI. The requirements of the
guidelines of SEBI are given below:-
a) Right of FCD/PCD holders: No
company shall pending the conversion of FCDs/PCDs issue any shares by way of
bonus unless similar benefit is extended to the holders of FCDs/PCDs, through
reservation of shares in proportion to such convertible part of FCDs/PCDs. The
shares so reserved may be issued at the time of conversion of such debentures
on the same terms on which the rights or bonus issues were made.
b) Out of free reserves: the
bonus issue shall be made out of free reserves built out of genuine profits or
share premium collected in cash only.
c) Revaluation of fixed assets:
reserves created by revaluation of fixed assets should not be capitalised. If
assets are subsequently sold and the profits are realized, such profits could
be utilised for capitalization.
d) Bonus issue not to be in lieu of dividend: The declaration of bonus issue, in lieu of dividend, should
not be permitted.
e) Fully paid shares: Bonus issue shall not be made, unless the partly paid
shares, if any, existing are made fully paid up.
f) No default in respect of deposit/debentures: the company should not have defaulted in payment of any
interest or principal in respect its fixed deposits and interest on debentures
or redemption of debentures.
g) Statutory dues of the employees: the company should not be defaulted in payment of its
statutory dues to the employees such as contribution to PF, gratuity, bonus,
minimum wages, workmen’s compensation, retrenchment, payment to contract labour
etc.
h) Implementation of proposal: the bonus issue shall be implemented within a period of 15
days after the date of approval of the BoD; it does not require the
shareholders’ approval for capitalization of profits or reserves for making
bonus issue as per the AoA of the company.
However,
if the company is required to get the shareholders’ approval as per AoA of the
company for capitalization of profits or reserves, the bonus issue shall be
implemented within 2 months from the date of the meeting of the BoD.
i) Provision in the AoA: the AoA of the company should provide the provision for the
capitalization profits, i.e. it must authorize the bonus issue, if not, and
steps should be taken to alter the AoA suitably.
j) Authorised capital: consequent upon bonus issue if the subscribed or paid up
capital of the company exceed the authorised capital, then a resolution shall
be passed by the company at its GM for increasing its authorised capital to
that extent.
k) Certificate: A certificate duly signed by the issuer company and
countersigned by the statutory auditor or the company secretary in practice to
the effect that the provisions of the guidelines has been complied with shall
be forwarded to the SEBI.
Reserves that can be utilised for issue of bonus shares
Free reserves that can be
used for issue of Bonus shares:
a)
Surplus in profit and loss account.
b)
General reserve.
c)
Dividend equalization reserve.
d)
Capital reserve arising from sale of fixed assets in cash.
e)
Balance in debenture redemption reserve after redemption of
debentures.
f)
Capital redemption reserve account created at the time of
redemption of redeemable preference shares out of the profits.
g)
Securities premium account collected in cash.
Reserves not available
for issue of Bonus Shares:
a)
Capital reserve arising due to revaluation of assets.
b)
Securities premium arising on issue of shares on
amalgamation or take over.
c)
Investment allowance reserve/ Development allowance reserve
before expiry of 4 years from the date of creation.
d)
Surplus arising from a change in the method of depreciation.
e)
Balance in debenture redemption reserve account before
redemption takes place.