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Getting more for the same amount is a blessing in disguise when you know it will double numerous times in the future. As a new-age Indian investor, you should be familiar with all of the stock market’s major principles and fundamentals in order to maximize your profits on your investment journey. Knowing about corporate actions, which are decisions made by corporations listed on the stock exchange, is one such critical factor. These can include the distribution of dividends, rights, split stocks, and bonus shares. In this article, we’ll discuss the Issue of Bonus Shares by Listed Company.
Quick Look
A Public Limited Company obtains its equity capital from shareholder investments. As a result, the shareholders anticipate a return on their investment. The corporation can do the same by paying out cash dividends or issuing bonus shares. Bonus shares are accumulated earnings that a firm gives as free shares to current owners. There are no additional charges, and the shares are assigned based on the present shareholder holdings.
Cash dividends are genuine transactions that entail a payout. However, there is no distribution in the case of bonus shares, and it is only a book item where Reserves are capitalized.
On the other hand, a listed company is a company whose stock is traded on an official stock exchange. It must comply with the exchange’s listing requirements, which may include the number of shares listed and a minimum earnings level.
Before we shall discuss Issue of Bonus Shares by Company, let us understand Bonus Share and Listed Companies so that we could have a better understanding.
Meaning of Bonus Share
Bonus shares are additional shares distributed to current shareholders as a “BONUS” instead of or in addition to paying a dividend to shareholders as a manner of dispersing company earnings. Bonus shares are often referred to as Bonus Issues, Scrip Issues, or Capitalisation Issues.
Only a company has the authority to issue bonus shares to its shareholders if it has made a substantial profit or has large free reserves that cannot be used for any specific purpose and can be dispersed as dividends. These bonus shares, however, are distributed to shareholders in proportion to their existing ownership in the company.
For example, if a corporation announces a 1:2 bonus issue, shareholders are entitled to one additional share for every two current shares they own. As a result, a shareholder who already has 200 shares will now receive an extra 100 shares, increasing the total number to 300.
When a bonus issue of shares occurs, the dividend per share drops as the number of shares increases. The share value also declines following a bonus issuance, preserving the shareholder’s investment value since the number of shares owned by a shareholder is more than before.
Meaning of Listed Company
Listed companies are public companies whose shares are listed and can be traded on a recognized stock exchange for public trading, such as Tata Motors and Reliance. These businesses are also known as quota companies. The listing of securities (shares) assists investors in determining the increase/decrease in the value of their investment in a particular listed company. This gives potential investors a good indication of the company’s goodwill and allows them to make various investment decisions as well as assess the viability of their investment in a company.
Issue of Bonus Shares by Company
Bonus Shares are shares that are distributed to current shareholders in proportion to the number of shares they own. They are extra shares distributed to existing stockholders. It is the issuance of additional shares by a corporation to its current owners without payment. For example, if an investor owns 100 shares of a corporation and the company announces a 2:1 bonus offer, his shareholding will be 300 instead of 100.
While the issuance of Bonus Shares increases the overall number of shares issued and owned, it has no effect on the Company’s value because the percentage of shares held by each shareholder stays unchanged.
Issuance of Bonus Shares is one of the common features in the corporate world. When a company accumulates a large surplus of profit and decides to convert that surplus into share capital, the company may issue Bonus Shares to its shareholders in proportion to their respective holdings.
Bonus Shares are issued in the form of capitalization of the company’s profit or reserves. It is also known as “capitalization shares” because these shares are issued on the basis of capitalization of profit or reserves. The main purpose is to a broad base of the company’s share capital. The issue of Bonus Shares does not constitute a cash outflow.
Conditions as specified for Issue of Bonus Shares
A company may issue fully paid bonus shares if the following requirements are met:
- The Company’s Articles of Association must permit the issuance of bonus shares; otherwise, the Company must amend its Articles of Association in accordance with Section 14 of the Companies Act, 2013.
- If the company’s authorized share capital is insufficient for the issuance of bonus shares, the authorized share capital must be increased to establish an acceptable number of shares.
- The Board of Directors must recommend the issuance of Bonus shares at their Board Meeting.
- In its General Meeting, the Company will sanction the issuance of bonus shares.
- The Company has not failed to reimburse the deposits.
- The Company has not had a default on its debt securities.
- The Company has not failed in the payment of employee statutory dues such as PF contribution, Gratuity, and Bonus.
- Prior to the announcement of any bonus shares, all partially paid-up shares must be completely paid.
Important issues relating to the Issue of Bonus Shares
The following are the important issues relating to the issue of Bonus Shares:
- Amount of Bonus Shares: The amount of Bonus Shares or the ratio of Bonus Shares will depend on the reserves and surplus of the company and also on the intention of the management regarding the number of reserves and surplus to be capitalized.
- If the authorized capital has been exhausted: In the case of Sanjay Paliwal v. Paliwal Hotels P. Ltd., (2007) 79 CLA 431 (CLB), it was held that if the authorized capital was already exhausted on the date of the purported allotment, no further allotment of shares could take place. Therefore, before starting the share issue process, the company should first increase the authorized share capital, and then it can start the share issue process. However, in the case of the adoption of the shareholders’ decision to increase the approved share capital and the decision to issue bonus shares, they may be adopted simultaneously at the same general meeting.
- Entitlement to Bonus Shares: Persons who are members on the cut-off date as decided by the board of directors are entitled to bonus shares. A person who has transferred his shares before the cut-off date is not entitled to bonus shares. [Rajiv Nag v. Quality Assurance Institute (India) Ltd.
Procedure for Bonus Shares by Listed Company
The following is the procedure for the issuing of Bonus Shares:
- Issue a notice of the board meeting at least 7 days before the day of the board meeting.
- In the case of a listed entity, inform the stock exchange in advance at least two working days before the date of the board meeting.
- Hold a board meeting and get the following proposal approved by the board:
- Recommend a bonus issue;
- Fix the ratio and amount of the bonus issue;
- Approve the announcement of the general meeting; Decide on the date, time, and place of the extraordinary general meeting;
- To authorize any director or company secretary to issue a notice of a general meeting and to do all necessary steps for issuing bonus shares.
- Approval of the board resolution (subject to the approval of members) for the issue of Bonus Shares and amendments to the MOA or AOA if required.
- Issue a notice of convening an extraordinary general meeting at least 21 days before the date of the extraordinary general meeting.
- Organize an extraordinary general meeting and adopt a proper resolution on the issue of bonus shares.
- File Form MGT-14 with the registrar within 30 days of passing the proper resolution. The following documents must be attached to the MGT-14 form: Notice with explanatory statements: certified true copy of all resolutions passed at the EGM A certified copy of the amended MOA if the MOA has been amended certified copy of the amended AOA if the AOA has been amended.
- Issue a notice of a board meeting and convene a board meeting to decide on the allocation of bonus shares.
Compliance check regarding issuing Bonus Shares in a Listed Company
The listed issuer must meet the following conditions in order to be eligible to issue bonus shares to members:
- It has not failed to pay interest or principal on fixed deposits or debt securities issued by it.
- It has not defaulted in the payment of employee statutory dues such as provident fund contributions, gratuity, and bonuses.
- Any outstanding partially paid shares on the date of bonus share allotment are made fully paid up.
- None of its promoters or directors are fugitives from due process.
- For a period of seven years, any corporate benefits in the form of securities accruing on such shares, such as bonus shares, shall also be credited to the appropriate demat suspense account or unclaimed suspense account, and after that time, shall be transferred by the listed entity in accordance with the provisions of Section 124(5) read with Section 124(6) of the Companies Act, 2013, and rules made there under.
- Only the following sources may be used to issue Bonus Shares in accordance with Section 63 of the Companies Act 2013:
- Its unreserved funds
- Alternatively, the securities premium account
- The reserve account for capital redemption:
With the exception that no bonus shares may be issued by capitalizing reserves generated by asset revaluations.
Limitations on the Issuance of Bonus Shares by Listed Companies
A bonus issue is also subject to the following restrictions:
- An issuer may conduct a bonus issue of equity shares only if it has reserved equity shares of the same class in proportion to the convertible component of any outstanding compulsorily convertible debt instruments.
- At the time of conversion of such convertible debt instruments, optionally convertible instruments, or warrants, as applicable, on the same terms or in the same proportion as the bonus shares were issued, the equity shares so reserved for the holders of fully or partially compulsorily convertible debt instruments or warrants shall be issued to the holder of such convertible debt instruments or warrants.
- Only free reserves, securities premium accounts, or capital redemption reserve accounts may be used to fund bonus issues; reserves produced via the revaluation of fixed assets may not be capitalized for this purpose. These accounts must be funded by actual profits or securities premiums.
- Dividends cannot be substituted with bonus shares.
- Once announced, a bonus issue cannot be changed.
Time Limitation Period for the completion of Issuance of Bonus Shares
A company that announces a bonus issue after the board of directors has approved it and does not need the shareholders’ consent to capitalize earnings or reserves for the bonus issue must carry it out within fifteen days of the board of directors’ approval date.
Also, the bonus issue must be implemented within two months of the date of the board meeting where the decision to announce the bonus issue was made subject to shareholders’ approval, provided that the issuer is required to seek their approval for capitalizing profits or reserves for making the bonus issue.
Conclusion
The Bonus Issue of Shares serves as a guarantee for the company. This assurance means that the company issuing the Bonus Shares can service any larger capital it holds. This basically means, in simple terms, that no company would issue Bonus Shares unless it was certain that it would receive profits from dividends and shares in the future. As a result, bonus issues promote a sense of goodwill on the part of the company.
