Bonus Share

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					                           BONUS SHARES

I. Meaning
    A company that has built up substantial reserves, sometimes decides to capitalize a part of
these reserves : (i) by issuing fully paid bonus shares to existing shareholders or; (ii) by converting
partly paid-up shares into fully paid-up without the shareholders having to pay anything.
    All successful companies increase their capital base by giving free shares to its existing
shareholders from the reserves when there are large accumulated reserves which cannot, either by
law or as a matter of financial prudence, be distributed as dividend in cash to shareholders. Since
bonus shares are created by the conversion of retained earnings or other reserves into equity share
capital, issue of bonus shares do not represent a source of fund to the company. When bonus shares
are given to the shareholders, they pay no money to the company and, in effect, the asset side of the
Balance Sheet remains unaffected. On the liability side, the reserve is reduced by the amount of the
increase in the equity share capital. In principle, shareholders are not better off as a result of bonus
issue, though no cash is paid to acquire these shares. This is because, issue of bonus shares makes
the more shares marketable and the market price per share is likely to drop.
II. Advantages of the Issue of Bonus Shares
    1. The shareholders get back their undistributed profit in the shape of shares.
    2. It reduces the liability of shareholders for uncalled capital, when bonus is applied for
       converting partly paid up shares into fully paid-up.
    3. Company can keep its shareholders happy without impairing the financial position and
       liquidity of the company.
    4. The security of the creditors will increase owing to increase in shares capital.
    5. It will increase the number of shares in the hands of existing shareholders without any extra
       payment, thus it will increase the marketability of shares.
III. Disadvantages of the Issue of Bonus Shares
   1. The rate of dividend in future will decline sharply, which may create confusion in the minds
       of the investors.
    2. It will encourage speculative dealings in the company's shares.
    3. When partly paid-up shares are converted into fully paid up shares, the company forgoes
        cash equivalent to the amount of bonus so applied for this purpose.

IV. SEBI guidelines (Section M) for Bonus Shares
1. These guidelines are applicable to existing listed companies who shall forward a certificate
    duly signed and duly countersigned by its statutory auditor or by a company secretary in
    practice to the effect that the terms and conditions for issue of bonus shares, as laid down in
    these Guidelines, have been complied with.
2. Issue of bonus shares after any public/rights issue is subject to the condition that no bonus
    issues shall be made which will dilute the value or rights of the holders of debenture,
    convertible fully or partly.
    In other words, no company shall pending conversion of FCDs/PCDs, issue any shares by way
    of bonus unless similar benefit is extended to the holders of such FCDs/PCDs, through
    reserved shares may be issued at the time of conversion(s) of such debentures on the same
    terms on which the bonus issues were made.
3. The bonus issue is made out of free reserves built out of the genuine profits or share premium
    collected in cash only.
4. Reserves created by revaluation of fixed assets are not capitalised.
5. The declaration of bonus issues in lieu of dividend, in not made.
6. The bonus issue is not made unless the partly-paid shares if any existing are made fully paid
7. The company —
    (i) has not defaulted in payment of interest or principal in respect of fixed deposits and
         interest on existing debentures or principal of redemption thereof, and
    (ii) has sufficient reason to believe that it has not defaulted in respect of the payment of
         statutory dues of the employees such as contribution to provident fund gratuity, bonus,
8. A company which announces its bonus issues after the approval of the board of directors must
    implement the proposals within a period of six months from the date of such approval and
    shall not have the option of changing the decision.
9. There should be a provision in the articles of association of the company for capitalisation of
    reserves etc. and if not, the company shall pass a resolution at its general body meeting making
    provisions in the articles of association for capitalisation.
10. Consequent to the issue of bonus shares if the subscribed and paid up capital exceed the
    authorised shares capital a resolution shall be passed by the company at its general body
    meeting for increasing the authorised capital.

V. Sources of Bonus Issue
 Fully paid-up bonus shares can be issued from    Partly paid-up bonus can be issued from the
 the following sources                            following sources
 1. Capital Redemption Reserve                    Only from free Reserves :
 2. Security Premium (Note 2)                     (i) Profit & Loss A/c
 3. Free Reserves
     (i) Profit & Loss A/c                        (ii) General Reserve
     (ii) General Reserve                         (iii) Capital Reserve (Note 1)
     (iii) Capital Reserve (Note 1)               (iv) Sinking Fund for Redemption of
     (iv) Sinking Fund for Redemption of                Debentures (After redemption)
           Debentures (After redemption)

Note : 1. Capital reserve created by revaluation of fixed assets and resulted without accrual of cash
          resources is not available for issue of bonus shares;
      2. Security Premium not realised in cash cannot be utilized for Bonus Shares;
      3. Security Premium Account and Capital Redemption Reserve Account can not be utilized
          for Partly paid-up Bonus Shares;
      4. If a choice can be made between Capital and Revenue Reserves, the Capital Reserve is
          normally utilized first as for as legally permissible.
    When Bonus is applied for converting partly paid-up shares into fully paid-up shares, it is
called Partly Paid-up Bonus Shares.
    When Bonus shares are distributed free of cost in proportion of holding it is called Fully Paid-
up Bonus Shares.
VI. Accounting Entries
1. For partly paid-up bonus shares
    (a) Equity Share Final Call A/c                                                  Dr.
          To Equity Share Capital A/c
        (Being Final Call money due on... shares @ Rs. each as per Board's Resolution dated...)
    (b) Profit & Loss A/c                                                            Dr.
         General Reserve A/c                                                         Dr.
         Capital Reserve A/c etc.                                                    Dr.
             To Bonus to Shareholders A/c
         (Being declaration of bonus as per Shareholders Resolution dated...)
    (c) Bonus to Share holders A/c                                                   Dr.
          To Equity Share Final Call A/c
         (Being the utilisation of bonus for converting partly paid-up shares into fully
         paid-up shares as per Board's Resolution dated...)

2. For fully paid-up shares
  (a) Capital Redemption Reserve A/c                                                 Dr.
      Security Premium A/c                                                           Dr.
       Other Reserve A/c etc.                                                        Dr.
            To Bonus to Shareholders A/c
      (Being declaration of bonus in the ratio... as per Shareholders' Resolution dated...)
  (b) Bonus to Shareholders A/c                                                      Dr.
            To Equity Share Capital A/c
      (Being utilisation of bonus for issuing fully paid bonus shares as per
      Board's Resolution dated...)


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