issue of bonus shares by private limited company

This query is : Resolved 

17 August 2009

Please tell me the procedure for issue of bonus shares by a private limited company.

A private limited comapany having paid up capital of Rs. 5.00 lacs and reserve and surplus of RS. 5.00 Crore wants to issue bonus shares to the shareholders.

Whats the ratio in which company can issue bouus shares and in which meeting whether board meeting or general meeting and what are the formalities in this regard.

Ankur Garg (Expert)
17 August 2009

Hi Neha,

The Companies Act, 1956 does not contain any provisions dealing with bonus shares. As per 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

Neha Jain (Querist)
17 August 2009

then what will be the share exchange ratio?
is there any restriction on that ?

Ankur Garg (Expert)
17 August 2009

No there is no restriction on share exchange ratio (Again check your Artical). Shareholders may decide the ratio keeping in view the financial position of the company.

Also read the below points in this regard:

Bonus shares are issued by cashing in on the free reserves of the company. The assets of a company also consist of cash reserves. A company builds up its reserves by retaining part of its profit over the years (the part that is not paid out as dividend). After a while, these free reserves increase, and the company wanting to issue bonus shares converts part of the reserves into capital.

What is the biggest benefit in issuing bonus shares is that its adds to the total number of shares in the market. Say a company had 10 million shares. Now, with a bonus issue of 2:1, there will be 20 million shares issues. So now, there will be 30 million shares. This is referred to as a dilution in equity.

Now the earnings of the company will have to be divided by that many more shares. Since the profits remain the same but the number of shares has increased, the EPS (Earnings per Share = Net Profit/ Number of Shares) will decline. Theoretically, the stock price should also decrease proportionately to the number of new shares. But, in reality, it may not happen.

A bonus issue is a signal that the company is in a position to service its larger equity. What it means is that the management would not have given these shares if it was not confident of being able to increase its profits and distribute dividends on all these shares in the future.

Neha Jain (Querist)
18 August 2009

can i company issue bonus shares if it dont have any amount in the securitites premium account.


Reserves and Surplus of that company includes only the accumulated profits earned by it and no securities premium amount ?

Juhi (Expert)
28 March 2011

What if their is no provision in the articles for the issue of bonus shares in a private limited company. Can company issue bonus shares simply by passing resolution in Board Meeting.

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