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Bonus Share Issue Corporate Procedures

📌 1. What are Bonus Shares?

A bonus share issue is the distribution of fully paid‑up shares to existing shareholders at no extra cost, in proportion to their existing holdings. It is essentially a capitalization of profits or reserves rather than a dividend payment—this means the company transfers amounts from reserves to share capital without cash outflow.

📌 2. Governing Legal Framework (India)

A. Companies Act, 2013

Section 63 expressly governs bonus shares. It allows a company to issue fully paid bonus shares out of:

Free reserves,

Securities premium account, or

Capital redemption reserve account.
Provided that revaluation reserves cannot be capitalized for this purpose.

Before bonus shares are issued, the company must:

Be authorized by its Articles of Association to issue such shares,

Have the Board recommend the issue and the members approve it in a general meeting,

Ensure no defaults in payments of interest or principal on deposits or debt securities,

Ensure no defaults in statutory employee dues, and

Make any partly paid‑up shares fully paid‑up before issuing bonus shares.

The Act expressly prohibits issuing bonus shares in lieu of dividend.

B. Companies (Share Capital & Debentures) Rules, 2014

Rule 14 mandates that once the board announces its recommendation for a bonus issue, the company cannot withdraw that decision.

C. SEBI Regulations (for listed companies)

SEBI’s Issue of Capital and Disclosure Requirements and LODR Regulations require additional disclosures, stock exchange notifications, and compliance around record date announcements, trading approvals, etc.

📌 3. Corporate Procedure for Bonus Issue

The typical procedural flow under corporate law is:

Step 1: Board Meeting

Give notice of a board meeting under Section 173, consider the bonus issue proposal (including ratio and record date), and approve sending notices for the general meeting.

Step 2: Notice of General Meeting

Issue notice to shareholders (usually with at least 21 clear days’ notice) for an Extraordinary General Meeting to approve the bonus issue.

Step 3: Members’ Approval

Pass a special resolution in the general meeting to authorize the bonus issue.

Step 4: ROC Filings

File Form MGT‑14 (approvals) with the Registrar of Companies within 30 days.

File Form PAS‑3 (return of allotment) within 30 days of allotment.

Step 5: Share Allotment and Certificates

Allot bonus shares and, if physical, issue share certificates within 2 months, or update the depositories for dematerialized shares.

Step 6: Maintain Registers

Update the Register of Members with the new share details.

📌 4. Key Legal Principles from Case Law

Below are six illustrative case law situations involving bonus shares, highlighting key legal interpretive points or disputes. (Most are Indian or directly relevant to legal treatment.)

Case Law 1 – Allotment Without RBI Approval (Fraudulent PAS‑3)

No.4 vs K.G. Inian (2016)
Facts: Bonus shares were issued to Non‑Resident Indians without Reserve Bank of India (RBI) approval and improper PAS‑3 filings.
Principle: Issuing bonus shares requires regulatory compliance (including foreign exchange approval where applicable). Failure to adhere may constitute actionable irregularity or fraud under company law procedures.

Case Law 2 – Petitioners Entitled to Bonus Shares Where Legal Title Exists

Taxmann Case (name anonymized)
Facts: Petitioners sought bonus shares; court held that if shareholders held legal title and there was no prohibitory court order, they were entitled to the bonus shares.
Principle: Legal title matters and procedural blocks (such as court injunctions) can preclude entitlement; in their absence, entitlement flows from corporate action properly taken.

Case Law 3 – High Court on Taxability of Bonus Shares

High Court on Section 56(2)(vii)
Facts: A shareholder received bonus shares from a private limited company and tax was levied under Section 56 of Income‑tax Act.
Principle: Bonus shares in themselves do not constitute taxable income under gifts provisions if they result solely from capitalisation of profits and do not confer real economic benefit beyond proportional holdings.

Case Law 4 – Supreme Court’s View on Nature of Bonus Shares

Dalmia Investment Co. Ltd v. CIT (referenced in tax jurisprudence)
Facts: Whether bonus shares were just a receipt without value.
Principle: Supreme Court recognized that bonus shares are capitalisation and do not represent a simple gift; value must be computed in context of share value averaging rather than treated as nil value for tax.

Case Law 5 – Decision on Revaluation Reserve Usage

Bhagwati Developers v. Peerless General Finance & Investment Co. (SC) (as cited in legal commentary)
Facts: Interpretation of whether revaluation reserves can be used for bonus issue.
Principle: Supreme Court held that listed companies may use revaluation reserves under certain circumstances, showing how judicial interpretation can adjust statutory constraints when properly construed.

Case Law 6 – Historical Equity Principle on Bonus Issues

Supreme Court on Allotment & Bonus (pre‑2013 era)
Principle: Earlier judgments explained the idea behind bonus shares is to bring nominal share capital in line with excess of assets over liabilities—reinforcing that bonus is capitalization, not a gratuitous gift.

📌 5. Practical Implications for Corporate Professionals

Statutory compliance is critical: Missing any condition under Section 63 or Rule 14 exposes the decision to challenge.

Documentation discipline: Board resolutions, general meeting resolutions, notice periods, ROC filings must be meticulous.

SEBI and dematerialization protocols: For listed companies, additional layers of compliance add complexity.

Tax & regulatory consequences: Courts have held that bonus shares are capitalization actions, not gifts—important for income‑tax treatment.

🧾 Summary of Key Legal Takeaways

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