Usage Of Various Reserves (Company Accounts)

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.

Sources on bonus issue

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]

Also Note:

If the company has adopted regulation 96 of Table A in Schedule I to the Companies Act, 1956 only the share premium account and 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. It is advisable to consult the auditors of the company in drawing up the terms and conditions of the bonus issue.

GOOD EXPLANATION BY KISHORE