Bonus issues are capital issues by companies to existing shareholders whereby no fresh capital is raised but capitalization of accumulated earnings is done. The shares capital increases, but accumulated earnings fall.
Features of Bonus Issues
A company shall while issuing bonus shares, ensure the following. The features of bonus issues are:
- The bonus issue is made out of free reserves built out of the genuine profits and shares premium collected in cash only.
- Reserves created by the revaluation of fixed assets are not capitalized.
- The development rebate reserves or the investment allowance reserve is considered a free reserve for the purpose of calculation of residual reserves only.
- All contingent liabilities disclosed in the audited accounts which have a bearing on the net profits shall be taken into account in the calculation of the residual reserve.
- The residual reserves after the proposed capitalization shall be at least 40 percent of the increased paid-up capital.
- Thirty percent of the average profits before tax of the company for the previous three years should yield a rate of dividend on the expanded capital base of the company at 10 percent.
- The capital reserves appearing in the balance sheet of the company as a result of the revaluation of assets or without accrual of cash resources are neither capitalized nor taken into account in the computation of the residual reserves of 40 percent for the purpose of bonus issues.
- The declaration of bonus issues in lieu of dividends is not made.
- The bonus issues are not made unless the partly paid shares if any exist, are made fully paid-up.
- The company (a) has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption thereof and (b)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 on bonus.
- A company that announces its bonus issue 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.
- There should be a provision in the Articles of Association of the company capitalization of reserves, etc., and if not, the company shall pass a resolution at its general body meeting making the decision in the Articles of Association for capitalization.
- Consequent to the issue of bonus shares if the subscribed and paid-up capital exceeds the authorized share capital, a resolution shall be passed by the company at its general body meeting for increasing the authorized capital.
- The company shall get a resolution passed at its generating for bonus issue and in the said resolution the management’s intention regarding the rate of dividend to be declared in the year immediately after the bonus issue should be indicated.
- No bonus shall be made which will dilute the value or rights of the holders of debentures, convertible fully or partly.