BONUS SHARES
INTRODUCTION TO BONUS SHARES
The word Bonus means to pay extra due to good
PERFORMANCE.
Bonus paid to shareholders can either be
1. Cash bonus
2. Capital bonus
1. Cash bonus: it is paid to shareholders only when
the company has larger reserves and sufficient
cash to pay bonus. It is also seen that the
payment of cash bonus does not affect the
working capital of the company
2. Capital bonus : it is paid when the company wants
to share the accumulated reserves with the
shareholders but it is not in a position to pay cash
bonus because it adversely affects the working
capital of the company. Capital bonus is given by
making partly paid shares as fully paid shares
without getting cash from the shareholders or it is
given by the issue of free fully paid shares known
as bonus shares
When Bonus shares can be issued
following are the circumstances that warrant the
issue of bonus shares :
1. When a company has accumulated large
reserves (capital or revenue) and it wants to
capitalize these reserves by issuing bonus
shares
2. When the company is not in a position to give
cash bonus because it adversely affects its
working capital .
3. When the value of fixed assets far exceeds the
amount of capital.
4. When the higher rate of dividend is not
advisable
for
the
distribution
of
the
accumulated reserves because shareholders
will demand the same rate of dividend in
future which may not be possible.
5. When there is a big difference between the
market value and paid up value of shares of
the company
Provisions of companies Act 1956
Sec 205 (3) : it provides that a company
may capitalize its profits or reserves for
the purpose of issuing fully paid bonus
shares or pay up any amount, for the
time being un paid, or any shares held
by the members of the company
Sec 78 (2) : the securities premium may
be applied in paying up un issued
shares of the company to be issued to
members of the company as fully paid
bonus shares
Sec 80 (5) : it provides that the capital
redemption reserve account may be
applied by the company in paying up
unissued shares of the company to be
issued to members of the company as
fully paid bonus shares
GUIDELINES ISSUED BY SEBI
1. The company has to issue a certificate countersigned by
the statutory auditor to the effect that the terms and
conditions for issue of bonus shares have been complied out.
2. The issue will not dilute the value or right of the holders of
partly or fully convertible denbentures.
3. The bonus issue is made out of free reserves built of
genuine profits or share premium collected in cash only.
4. Reserves created by
revaluation
of assets
company
to be
issuedare
to not
members
capitalized.
of
the company as fully paid bonus shares
5. The bonus issue is not made unless the partly paid shares,
if any are made fully paid.
6. There is a provision in the article of association for
capitalization of reserves and if not, the company should
pass resolution making the provision in AOA of company
7. The company must implement the proposal within six
months from the date of approval, of the board of directors.
FREE RESERVES THAT CAN BE USED FOR BONUS ISSUE
1.
2.
3.
4.
SURPLUS IN P&L A/C
GENERALRESERVES
DIVIDEND EQUALISATION RESERVE
CAPITALRESERVE ARISING FROMPROFIT ON
SALE OF FIXED ASSETS RECEIVED IN CASH
5. BALANCE IN DEBENTURE REDEMPTION
RESERVE AFTER REDEMPTION OF
DEBENTURE.
6. CAPITAL REDEMPTION RESERVE A/C
CREATED AT THE TIME OF REDEMPTION OF
REDEEMBLE PREFERENCE SHARES OUT OF
THE PROFITS
7. SECURITIES PREMIUM COLLECTED IN CASH
ONLY
RESERVES NOT AVAILABLE FOR ISSUE
1. CAPITAL RESERVE ARISING DUE TO
REVALUATION OF ASSETS.
2. SECURITIES PREMIUM ARISING ON
ISSUE OF SHARES ON AMALGAMATION
OR TAKE OVER
3. INVESTMENT ALLOWANCE RESERVE
/DEVELOPMENT REBATE RESERVE
BEFORE EXPIRY OF 8 YEARS OF
CREATION
4. BALANCE IN DEBENTURE REDEMPTION
RESERVE A/C BEFORE REDEMPTION
TAKES PLACE
5. SURPLUS ARISING FROM A CHANGE IN
THE METHOD OF CHARGING
DEPRECIATION
ACCOUNTING TREATMENT
A) IFTHE BONUS IS UTILISED FOR MAKING PARTLY PAID
SHARES AS FULLY PAID SHARES
1) PROFITAND LOSS A/C
Dr
(OR) GENERAL RESERVE A/C
Dr
(OR) CAPITAL RESERVE A/C
Dr
TO BONUS TO SHAREHOLDERS A/C
{BEING AMOUNT TRANSFERRED TO BONUS TO SHAREHOLDERS
A/C}
2. SHARE FINALCALLA/C
TO SHARE CAPITAL A/C
{ BEING FINAL CALL DUE ON SHARES}
Dr
3. BONUS TO SHAREHOLDERS A/C Dr
TO SHARE FINAL A/C
{ BEING THE BONUS TO SHAREHOLDERS UTILZED TOWARDS
SHARE FINAL CALL A/C}
B. FOR ISSUING FULLY PAID BONUS SHARES
• 1. PROFIT AND LOSS A/C
Dr
•
(OR) GENERAL RESERVE A/C
Dr
•
(OR) CAPITAL RESERVE A/C
Dr
(OR) SECURITIES PREMIUM A/C
Dr
(OR) CAPITAL REDEMPTION RESERVE A/C
Dr
(OR) ANY OTHER RESERVE A/C
Dr
TO BONUS TO SHAREHOLDERS A/C
{BEING THE P&L A/C AND RESERVES TRANSFER TO BONUS TO
SHAREHOLDERS A/C}
2. BONUS TO SHAREHOLDERS A/C
Dr
TO SHARE CAPITAL A/C
TO SECURITIESPERMIUM A/C
{BEING THE ISSUE OF BONUS SHARES}
Definition of 'Debenture Redemption Reserve'
A provision that was added to the Indian Companies Act of 1956
during an amendment in the year 2000. The provision states that any
Indian company that issues debentures must create a debenture
redemption service to protect investors against the possibility of
default by the company
Under the provision, debenture redemption reserves will be funded
by company profits every year until debentures are to be redeemed.
If a company does not create a reserve within 12 months of issuing
the debentures, they will be required to pay 2% interest in penalty to
the debenture holders. Only debentures that were issued after the
amendment in 2000 are subject to the debenture redemption service.
Capital redemption reserve
A capital redemption reserve is an established fund that holds
money to protect a company from the loss of capital. A company
protects itself from such a loss by essentially setting aside the
amount of capital required for the specific transaction. By
maintaining the capital redemption reserve, the company can set
aside adequate funding to pay creditors in the event that it runs
into financial problems. It can use the capital redemption reserve
for
specific
purposes
with
court
approval
When to use CRR fund
• According to “Principles of Finance,” by Scott Besley and Eugene
Brigham, the most common situation that requires a company to
create a capital redemption reserve is a redemption of shares. Per
SEC regulations, any time a company buys back its own shares
with capital or with new shares, it must put the same amount of
money into a capital redemption reserve. The fund, therefore,
offsets the reduction of the company’s equity as a result of the
share buyback. The company must set aside the same amount of
capital in a capital redemption reserve fund when it purchases the
shares
with
company
profits
This means the company can use the funds for no purpose beyond
that of maintaining company equity or issuing bonus shares.
Ultimately, the capital redemption reserve protects a company’s
creditors.