How are the Bonus Shares Issued?

Ans.

ISSUE OF BONUS SHARES

The SEBI has issued the following guidelines for issue of bonus shares vide their RMB (DIP series) circular number 2 of 15-4-94.

The SEBI (Disclosure and Investor Protection) Guidelines, 2000 have not changed the provisions of these earlier guidelines. The new provisions contained in chapter xv of the SEBI Guidelines 2000 are substantially the same as in old guidelines.

(1) The Board of Directors of the company must take into consideration the relevant financial factors before deciding on bonus issue.

(2) Articles of association of the company must permit bonus issue. If articles of association do not contain authorization, the articles should be altered first to the effect.

(3) If the bonus issue may result in paid up capital of the company crossing the authorized capital, the authorized capital has to be increased before the bonus can be declared.

(4) A company which has defaulted in payment of interest or principal to the deposit holders or debenture holders cannot issue bonus shares. Similarly if the default has been provident fund, gratuity bonus, the company cannot issue bonus shares.

(5) Bonus issue can be declared only if all shares existing are made full paid up.

(6) If, at the time of declaration of bonus issue, there are convertible debentures (fully/partly convertible) pending conversion the issue of bonus shares must give similar benefits by way of reservation to the debenture holders such number of bonus shares to which they are entitled in relation to their shareholding upon conversion of debenture into shares at future date.

(7) The bonus cannot be declared in lieu of dividend.

(8) Bonus can be made out of free reserves built out of genuine profits or out of share premium account.

(9) Reserve created out of revaluation of fixed assets are not available for issue of bonus shares.

(10) The bonus issue must be approved by Board of Directors. Freedom is given to Board to decide bonus issue. Those resolutions stipulating financial test like residual reserve, yield on expanded capital etc. had been done away with. This is in keeping with the current trend of liberalization of economy of the government. But these financial factors are left to be considered by Board for the good of the company.

(11) Bonus issue must be within 6 months of Board’s approval.