When can a company issue bonus shares?
A company may issue fully paid bonus shares to its members out of its free reserves, its securities premium account, or its capital redemption reserve account. The issue is authorised by the articles, recommended by the board, and approved in general meeting.
Which reserves can fund a bonus?
Section 63 names those three sources. A reserve created by the revaluation of assets is not one of them. The shares issued are fully paid. The company does not issue the bonus in place of a dividend. A cash dividend, and the profits it may be paid from, are on the dividend page.
When is a bonus barred?
The company cannot issue bonus shares if it has defaulted in payment of interest or principal on fixed deposits or debt securities it has issued, or in payment of a statutory due of an employee, such as a provident-fund, gratuity, or bonus contribution. Partly paid shares already issued are made fully paid before the bonus. Once the board’s recommendation has been announced, the company does not withdraw it.
What else can the securities premium do?
Section 52 keeps the premium received on an issue of securities in a separate account. It may be used to issue fully paid bonus shares, to write off preliminary expenses, to write off the expenses, commission, or discount on an issue of shares or debentures, to provide for the premium payable on redemption of preference shares or debentures, or to buy back shares under section 68. A use outside that list is treated as a reduction of capital. For the classes of company the rules name, a bonus, a write-off of equity-issue expenses, or a buy-back from this account also requires that the accounting standards have been complied with.
How is this different from a dividend?
| Point | Bonus shares | Dividend |
|---|---|---|
| What the member receives | Fully paid shares | Cash, or a credit by cheque or electronic mode |
| Source | Free reserves, securities premium, or the capital redemption reserve | Profits after depreciation, or money a government provided for the dividend |
| Section | Section 63, and section 52 where the premium is used | Section 123 |
Frequently asked questions
Four questions cover a revaluation reserve, withdrawal, partly paid shares, and cash.
Can a revaluation reserve fund a bonus?
No. Section 63 allows free reserves, the securities premium account, and the capital redemption reserve. A reserve created by revaluation of assets is outside that list.
Can the board withdraw a bonus it has announced?
No. Once the company has announced the board’s decision to recommend a bonus issue, that decision is not withdrawn.
Can partly paid shares receive a bonus?
The bonus shares themselves are fully paid. Partly paid shares already in issue are made fully paid before the bonus issue.
Is a bonus issue a cash dividend?
No. A dividend is paid in cash or by an electronic mode. Capitalising profits as fully paid shares is not that payment.
Sources
Bonus shares are section 63 of the Companies Act. The securities premium account is section 52. A cash dividend is section 123.