Dear Friends / Experts
We are going for an issue of Bonus Shares in a Private Limited Company ? The Authorized and Paid Up Capital of the Company is both 5 lacs each.
It came to our knowlege that issue of bonus shares does not result in any changes pf the value of the Company !!! We need Clarification as whether the share capital needs to be altered ? and whether such bonus issues will result in increase of the paid-up capital of the Company ?
Thanks in Advance.
Obviously, it will increase Paid up capital. You need to increase Authorised capital before doing bonus issue.
"Although the number of shares held by each shareholder increases, the value of the total shareholding remains the same as before the bonus issue. Also called scrip issue, bonus shares, or capitalization issue."
"Companies issue bonus shares to encourage retail participation and increase their equity base. When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared"
Dear Sir
Could you Kindly Explain the Above ?
Overall capital consist of paidup share capital as well as reserves.
Bonus shares are issued out of companies' reserves. Suppose, if I have 100 shares and company issues one bonus for each share. Then I will be the holder of 200 shares. So, overall companies shares are increased. It does not decrease the face value the shares. Hence Bonus shares will increase paid up capital but decrease the reserves. However, overall capital will remain same.
E.g
Before Bonus issue:
Paid up capital - Rs 1,00,000
Reserves - Rs 1,00,000
Total capital - Rs 2,00,000
After Bonus Issue:
Paid up capital - Rs 2,00,000
Reserves - NIL
Total capital - Rs 2,00,000
By above, you can see that overall capital remain as it is. However since paid up capital is increasing and if authorised capital is not enough, then company has to increase the authorised capital first.
Dear Sir
Thanks for your time and support in explaining this accordingly !!! We will proceed as per this.
CAclubindia
