Bonus shares are additional shares issued by a company to its existing shareholders without any extra payment, in a proportion to their current holdings. These are issued by capitalizing the company’s reserves, and do not involve any fresh inflow of funds.
The objective of issuing bonus shares is to reward shareholders, improve market perception, and enhance liquidity of shares in the market.
Legal Provision – Section 63 of Companies Act, 2013
➤ Text of Section 63(1):
A company may issue fully paid-up bonus shares to its members, out of:
- Its free reserves,
- The securities premium account, or
- The capital redemption reserve account
➤ Proviso to Section 63(1):
Bonus shares shall not be issued by capitalizing reserves created by the revaluation of assets.
Key Conditions for Issue of Bonus Shares (Section 63(2))
A company can issue bonus shares only when the following conditions are fulfilled:
✅ (a) Authorization in Articles of Association (AOA):
- The company’s AOA must authorize the issue of bonus shares.
- If not, the AOA must be amended under Section 14 (by passing a special resolution in a general meeting).
✅ (b) Board and Shareholder Approvals:
- The issue of bonus shares must be approved:
- By the Board of Directors, and
- By the shareholders, through ordinary resolution in a general meeting, if increase in authorized share capital is involved.
🚫Note: If authorized capital is sufficient and AOA allows, only Board approval is required.
✅ (c) No Default Condition:
The company must not have defaulted in:
- Repayment of deposits or interest thereon,
- Repayment of debentures or interest,
- Payment of statutory dues like:
- Provident Fund (PF),
- Gratuity,
- Bonus to employees, etc.
✅ (d) No Bonus in Lieu of Dividend:
- Bonus shares cannot be issued in place of dividend.
- This ensures that companies do not misuse the bonus mechanism to avoid actual cash outflow.
Applicable Rules and Regulatory Framework
Rule 14: Conditions for Issue of Bonus Shares
A company may issue fully paid-up bonus shares, subject to the following conditions:
- Authorization by AOA
- Recommendation by the Board and approval in general meeting (if required)
- Bonus shares can be issued out of:
- Free reserves,
- Securities Premium Account,
- Capital Redemption Reserve
- No issue of bonus shares unless partly paid shares are made fully paid-up
- No default in payment of statutory dues
- Bonus shares are not issued in lieu of dividend
🖊️ Bonus shares must be issued only to existing shareholders in proportion to their shareholding.
Step-by-Step Procedure to Issue Bonus Shares
| Step | Description |
| 1️⃣ | Check Authorization in AOA |
| 2️⃣ | Hold Board Meeting: Pass resolution for bonus issue and fix general meeting date (if needed) |
| 3️⃣ | Check Authorized Share Capital: If increase is needed, alter MoA by ordinary resolution |
| 4️⃣ | Hold General Meeting: Pass necessary resolutions (if required) |
| 5️⃣ | Ensure No Defaults in statutory payments and company financial obligations |
| 6️⃣ | Make Partly Paid-up Shares Fully Paid (if any exist) |
| 7️⃣ | File Forms with ROC: |
- MGT-14 (if special/ordinary resolution is passed),
- SH-7 (for increase in authorized share capital),
- PAS-3 (Return of allotment)
| 8️⃣ | Credit Bonus Shares to shareholders’ demat accounts or issue physical share certificates |
| 9️⃣ | Update Register of Members and other statutory records |
🧾 6. ROC Compliance – E-Form Filings
| Form | Purpose | Timeline |
| MGT-14 | Filing of resolutions with ROC | Within 30 days of passing resolution |
| SH-7 | Alteration of authorized capital (if required) | Within 30 days |
| PAS-3 | Return of allotment | Within 30 days of allotment |
Time Limit for Allotment
As per SEBI guidelines:
- Bonus shares must be allotted within 15 days from:
- Board approval, if no shareholder approval required
- Shareholder approval, if required
Restrictions/Not Permitted
| Not Permitted | Explanation |
| ❌ Capitalizing revaluation reserves | Not allowed under Section 63(1) |
| ❌ Issuing bonus in lieu of dividends | Considered misuse |
| ❌ Issuing bonus when defaults exist | No bonus if company has pending dues/statutory defaults |
| ❌ Issuing bonus to preference shareholders (unless specified) | Only equity shareholders get bonus unless otherwise stated |