BONUS ISSUE

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Ishan Bedi (Querist)

22 September 2010 CAN A PRIVATE LIMITED COMPANY ISSUE BONUS SHARES WITH REVALUATION RESERVE?

KINDLY PROVIDE RELEVANT SECTIONS IN PURSUANCE OF ABOVE.

Ankur Garg

Ankur Garg (Expert)

22 September 2010 Hi,

The Companies Act, 1956 does not contain any provisions dealing with bonus shares. Section 205(3) of the Companies Act, 1956 there is no prohibition on a company to capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares or paying up any amount, for the time being unpaid, on any shares held by the members of the company.

You need to check whether your Articles of Association contains any restriction on capitalization of profits or reserves for issuing fully paid up bonus shares.

Regulations 96 & 97 of Table A to Schedule I of the Companies Act, 1956 contain provisions relating to capitalisation of profits and reserves of the company. As per these regulations the proposal to issue bonus shares has to be approved by the shareholders of the company in general meeting upon recommendation by the Board of Directors of the company However if these regulations have been excluded from the Articles of Association of the company then it shall be sufficient if the Board approves the bonus issue.

To conclude if your AOA required obtaining shareholders approval then you need to pass Ordinary Resolution and file form 23 along with form 2 for allotment otherwise it shall be sufficient to pass Board resolution for allotment of bonus shares.

Best Regards

Ankur Garg

Ankur Garg (Expert)

22 September 2010 Can a company issue Bonus Shares out of Re-valuation reserve?

Provisions contained in the Companies Act, 1956

The Companies Act, 1956 does not contain a separate set of sections dealing with bonus shares. The Act though has made references to bonus issue/shares in its certain sections. Reference may be made to section 205 of the Companies Act, 1956, which provides that dividend could only be paid out of profits. The proviso to subsection (3) of section 205 permits capitalization of profits or reserve of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company.

So as per the interpretation the Companies Act permits utilization of reserve arising out of revaluation of assets for purpose of issuing fully paid up bonus shares. But one should also not forget this area is very critical and vulnerable—

1. Capitalization of profits is a process where accumulated profits and reserves are converted into capital.

2. The issue of bonus shares is permitted only out of free reserves (being built up from genuine profits of the entity) or from Share premium account (collected in cash only). It is worth to note here Capital Reserves created on revaluation of assets or without cash accrual should be ignored for the purposes of bonus issues.

Regards,

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