Bonus shares

Hey guys

Welcome back!!!!! How are you all??

I am very glad after seeing your love to my previous articles. This motivates me to write more and more much I can. So today I am going to talk about bonus shares, their meaning and the rules and guidelines of SEBI on it. This article will help you in your studies, making investing decisions etc.

So listen carefully…..

Bonus shares: bonus shares are the free shares, given to the fully paid shareholders. Look when company is making profits year on year and these profits are transferred to reserves year on year, company may use this reserve basically for three purposes:

1) For distributing dividends

 2) For expansion of its business  

3) For issue of bonus shares.

Now listen carefully….

• As you know shareholders have right on profits ; ……if company is paying dividend then it will be an income for shareholder ………., if company opt for expansion then this will lead to growth in shareholder’s wealth in future,………… and if company opt for issue of bonus share then it will increase number of shares which are held by shareholders.

  Yes bonus shares increases number of shares of investors at free cost.

For example: if you have 10 shares of Infosys ltd of total rupees 500.  And the company has announced bonus issue at 2:1 (it means you will get 2 shares for every 1 share held.) then you will get 20 shares for your 10 shares and now the no of shares in total will be 10 + 20 = 30 shares (after bonus issue) but your capital will be same ( rupees 500). It means there will be no effect on your capital but the share price will decrease.

• Here you will surely relate it with stock split but there is a little difference, if company opts for stock split then there will be no impact on reserves. The reserves will be the same. But in case of bonus issue, free reserves are used and investors get attracted by the company’s action so they demands more share in the market which in turn leads to rise in the market price of share. 

 In case of stock split company reduces the face value of shares by which number of shares gets increased and the value of investment remains same.  This brings liquidity in the shares and the retail investors get attracted to buy new shares at reduced prices. However face value has also decreased.  

For example : suppose you have 10 shares of having face value of 2 rupee each and company decided to do split by reducing face value to rupee 1 per share. Now you will have 20 shares of face value 1 per share due to splitting. 

But in bonus issue, face value of share remains same but the number of share will increase as company uses its free reserve to give bonus shares. This will also leads to liquidity in the share. Understood????? Say yes!!!!!!

Sources of issuing bonus shares:  According to section 63(1) of companies act 2013, company may issue bonus shares out of following reserves:

1) Security premium reserve (as I discussed previously in my article)

2) Capital redemption reserve

3) Any free reserve like surplus in P&l, general reserve etc. (except revaluation reserve)

Accounting entry:

Date	particulars	Amount	Amount
1	Security premium reserve                                      dr. Statement of P&l                                                    dr. Capital redemption reserve                                    dr.              To share capital (bonus issue )

                Do you know,what laws say about bonus issue? What are the pre required conditions that should be followed by the company before issuing bonus share?

No???? then listen to me!!!!

Conditions for Bonus issue:  following conditions should be fulfilled before issue of bonus shares

1) Articles of association should authorize the bonus issue. If there is no authorisation in the articles then company should first provide in it by passing special resolution at general meeting (AGM) of company.  

2) Bonus issue must be sanctioned by board of directors of the company in AGM.

3) Guidelines of SEBI must be fulfilled.

4) If company is an listed company then it should inform to stock exchanges.

5) If the company has taken any loan from any financial institution then an approval will also be taken from that company regarding the bonus issue.

6) If members are Non – Resident than consent from RBI should also be taken.

Guidelines of SEBI: 

1) Issue should be made out if free reserves except revaluation reserve.

2) It should not be made in lieu of profits.

3) There should be no default in paying fixed deposits.

4) Bonus issue should be made within 6 months from date of approval.

So these were the pre required conditions that should be followed by the company, if the company wants to issue bonus shares.

Understood??? Yes!!!!! Sounds good !!! Then do follow us and share it to all your friends

I hope, you have learnt much more about the bonus issue, if yes!!! Then drop your feedback into comment box So that, I get motivation to write more and more on such type of topics. if you have any query relating to this topic then ask me on shivamsir009@gmail.com if you want any video lesson on it then comment me in below the box.

Thank you

Shivam garg

Team Go Commerce