How to issue bonus shares

THE FOLLOWING STEPS GIVES YOU A CLEAN VIEW IN CARRYING OUT BONUS ISSUE PROCESS
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STEPS:

1.    VERIFY WHETHER THE COMPANY IS ELIGIBLE TO ISSUE BONUS SHARES

2.    VERIFY WHETHER THERE IS ADEQUATE UN-ISSUED EQUITY CAPITAL IN THE AUTHORIZED CAPITAL

3.    DETERMINE THE TERMS AND CONDITIONS OF BONUS ISSUE

4.    CONVENE BOARD MEETING -  PASS BOARD RESOLUTION

5.    GIVE NOTICE OF EXTRAORDINARY GENERAL MEETING

6.    PASS ORDINARY RESOLUTION IN THE EXTRAORDINARY GENERAL MEETING

7.    CONVENE BOARD MEETING --MAKE ALLOTMENT OF SHARES

8.    FILE RETURN OF ALLOTMENT

9.    ALL SHARE CERTIFICATES SHALL BE DELIVERED TO THE SHAREHOLDERS WITHIN 3 MONTHS FROM THE DATE OF ALLOTMENT OF BONUS SHARES.

VERIFY WHETHER THE COMPANY IS ELIGIBLE TO ISSUE BONUS SHARES 

Issue of bonus share is a common feature and it takes place when the company accumulates a large surplus. This surplus is converted into capital and divided among members in proportion to their rights as fully paid bonus shares. Bonus issue is also known as capitalisation issue as the purpose behind this is to capitalise profits which are available in the hands of the company after the distribution of profits as dividends to its shareholders. 

The Companies Act, 1956 does not contain any provisions dealing with bonus shares, though it has made references to bonus issue in certain sections. 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.

Check whether the Articles of Association of the company contains any restriction on capitalisation of profits or reserves for issuing fully paid up bonus shares. 

Regulations 96 & 97 of Table A to Schedule I of the Companies Acty, 1956 contain provisions relating to capitalisation of profits and reserves of the company. According to these regulations only the share premium account and the capital redemption reserve account shall be applied in the paying up of unissued shares to be issued to members of the company as fully paid bonus shares. Also 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. 

VERIFY WHETHER THERE IS ADEQUATE UN-ISSUED EQUITY CAPITAL IN THE AUTHORIZED CAPITAL 

Check whether the present authorized capital has adequate un-issued equity capital to accommodate the proposed bonus issue of shares. 

If the un-issued equity capital in the authorized capital is not sufficient, the authorized capital has to be increased to create adequate number of shares. 

DETERMINE THE TERMS AND CONDITIONS OF BONUS ISSUE 

Before placing the proposal before the Board of Directors of the company, determine the terms and conditions of the bonus issue, namely, 

A. Bonus issue ratio, i.e., the number of bonus equity shares proposed to be offered to the equity shareholders of the company for every equity share held by them. 

B. Total number of equity shares proposed to be offered as bonus shares
There is no restriction on the number of equity shares that a company may offer as bonus shares. 

C. Objects of the issue 
Objects of bonus issue may include one or more of the following, namely, 
1. Bridges the gap between capital and fixed assets. 
2. Increase the market price of its shares. 
3. Creates confidence for the investors/shareholders in the company. 
4. Good market reputation. 
5. Increases liquidity of shares. 

D. Sources on bonus issue – Securities premium and or Capital redemption reserve
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. However the following points have to be borne in mind while determining the profits or reserves which may be capitalized, namely, 

1. The securities premium account may be applied by the company in paying up unissued securities of the company to be issued to members of the company as fully paid bonus securities [Section 78(2) of the Companies Act, 1956] 

2. 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. 
[Section 80(5) of the Companies Act, 1956] 

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