Issue of bonus share

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

22 August 2013 dear expert,

if private limited company have issued bonus share from revaluation reserve ,what as a statutory auditor we have to do?

should we qualify the report ?
please replay.

regards

Ajay Mishra

Ajay Mishra (Expert)
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22 August 2013 Hi

As per Department of Company Affairs vide Circular No. 9/94, dated 6-9-1994, existing
private/closely held and unlisted companies not to issue bonus shares out of reserves created by revaluation of fixed assets.

It will depend on you, what to do.

Message likes : 1 times

Querist : Anonymous

Querist : Anonymous (Querist)

23 August 2013 mishra ji
company has already issued then what are the ways to overcome this situation
is there any other option than to qualify report

Querist : Anonymous

Querist : Anonymous (Querist)

23 August 2013 mishra ji company has already issued then what are the ways to overcome this situation is there any other option than to qualify report

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2024 When a private limited company issues bonus shares from a revaluation reserve, as a statutory auditor, you need to ensure that the issuance complies with legal requirements and accounting standards. Here's what you need to consider and do:

### **1. Compliance with Legal Requirements**

**Bonus Shares from Revaluation Reserve:**

- **Legal Provisions:**
- The issuance of bonus shares from revaluation reserves is generally not permitted under Indian laws. According to the Companies Act, 2013, bonus shares can be issued only from:
- Free reserves.
- Securities premium account.
- Capital redemption reserve.

- **Revaluation Reserve:**
- The revaluation reserve is meant to account for the increase in asset value and is not considered a free reserve. Therefore, issuing bonus shares from this reserve contravenes legal provisions.

### **2. Auditor's Responsibilities**

**Audit Report Considerations:**

- **Qualification of Report:**
- If bonus shares have been issued from the revaluation reserve, it constitutes a breach of the Companies Act, 2013. As a statutory auditor, you are required to qualify your audit report to reflect this non-compliance.

- **Content of Qualification:**
- The audit report should clearly state the nature of the non-compliance, detailing that the bonus shares were issued from a revaluation reserve in contravention of the Companies Act, 2013.

### **3. Possible Actions**

**Rectifying the Situation:**

- **Adjustment of Bonus Shares:**
- The company should ideally reverse the issuance of bonus shares from the revaluation reserve and reissue them from a permissible source like free reserves or the securities premium account.

- **Shareholder Approval:**
- The company must convene a shareholders' meeting to seek approval for reclassifying or adjusting the reserves and issuing bonus shares correctly.

- **Revisions and Filings:**
- Correct the accounting entries and file necessary forms with the Registrar of Companies (ROC) to reflect the changes.

### **4. Reporting and Communication**

**Auditor’s Report:**

- **Emphasize Matter:**
- Include an emphasis of matter or qualification in the audit report based on the significance of the non-compliance.

**Management's Responsibilities:**

- **Corrective Action:**
- The management must take corrective actions to comply with the legal requirements and rectify the errors.

### **Summary**

- **Legal Issue:** Issuing bonus shares from revaluation reserves is not permissible under the Companies Act, 2013.
- **Auditor's Report:** You should qualify the audit report to reflect this non-compliance.
- **Correction:** The company should reverse the bonus shares issued from revaluation reserves and issue them from a permissible source.
- **Communication:** Clearly document and communicate the issue in your audit report, and ensure that the company takes corrective action to comply with legal requirements.

**Note:** Ensure to consult with legal advisors or company secretaries to address the compliance issues properly and follow the correct procedures for rectification.

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