Meaning: - A company following conservative dividend policy accordingly shall
transfer a large portion of divisible profits to the reserves every year. The accumulation
of such retained may enable the company to capitalise its profits so as to
establish proper balance between the paid-up capital and reserves. However, the
capitalisation of profits is termed as issue of bonus shares.
Bonus shares can be defined
as shares issued by the company to its existing equity shareholders out of
accumulated reserves. The bonus shares are equity shares that are issued to
existing equity shareholders free of cost or as a gift by the company.
Conditions for issue of Bonus Shares
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1.
The issue of bonus shares must be authorized by
Articles of Association of the company. If it is not provided, the company
should pass a resolution in its shareholders meeting making provision in the
Articles for issuing bonus shares.
2.
It must be recommended by a board resolution and
then approved by the shareholders in general meeting.
3.
The bonus issue is made out of free reserves built
out of genuine profits or share premium collected in cash.
4.
Reserves created by revaluation of fixed assets are
not capitalised for bonus shares.
5.
The bonus issue is not made unless the partly
paid-up shares, if any existing is made fully paid-up.
6.
There can be issue of bonus shares only twice in a
period of 5 years.
7.
The company issuing bonus shares should not have defaulted
in payment of statutory dues such as contribution to provident fund, gratuity,
and bonus.
8.
Consequent to the issue of Bonus Shares, if
the subscribed and paid-up capitals exceed the authorized capital, a resolution
should be passed by the company at its general body meeting for increasing the
authorized capital.
9.
No bonus shares issue can be made by the company
which will dilute (reduce
in strength) the value or rights of the share holders of convertible
debentures, fully or partly.
10.
Bonus shares cannot be issued within 12 months of
any public right issue or right issue.
