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Bonus Shares – Concept & SEBI Guidelines

Introduction

Bonus Shares are shares issued free of cost to existing shareholders. It is essentially Capitalisation of Profits. The company converts its accumulated reserves (Profits) into Share Capital.

  • Benefit to Company: Cash is conserved (no dividend payout), Capital base increases.
  • Benefit to Shareholder: More shares held, tax-free receipt.

1. Sources for Bonus Issue

Which reserves can be used?

  1. Capital Redemption Reserve (CRR): ONLY for fully paid bonus shares.
  2. Securities Premium Account: ONLY for fully paid bonus shares.
  3. General Reserve / P&L Account: Free reserves.

Note: Revaluation Reserve CANNOT be used for bonus issue.

2. SEBI Guidelines (Key Points)

  1. Authorisation: Must be authorized by Articles of Association (AOA).
  2. No Default: Company should not have defaulted in payment of interest/principal on debt or statutory dues (PF/Gratuity).
  3. Fully Paid: Existing partly paid shares must be made fully paid before issuing bonus.
  4. No Dividend Substitute: Bonus issue cannot be made in lieu of dividend.
  5. Implementation: Once announced, the Board cannot withdraw the bonus issue.

3. Accounting Entries

Step 1: Making Partly Paid Shares Fully Paid (If any)

Before bonus, call up the unpaid amount.

Share Final Call A/c ...Dr         (Amount)
    To Share Capital A/c               (Amount)

Bank A/c ...Dr                     (Amount)
    To Share Final Call A/c            (Amount)

Step 2: Declaration of Bonus

Transfer Reserves to "Bonus to Shareholders A/c".

Capital Redemption Reserve ...Dr   (Amount)
Securities Premium A/c ...Dr       (Amount)
General Reserve A/c ...Dr          (Amount)
    To Bonus to Shareholders A/c       (Total Face Value)

Step 3: Issue of Shares

Convert the Bonus liability into Capital.

Bonus to Shareholders A/c ...Dr    (Total Face Value)
    To Share Capital A/c               (Total Face Value)

Illustration

Data:

  • Company has 10,000 Equity Shares of ₹10 each fully paid.
  • Reserves: CRR (20,000), Sec Prem (10,000), Gen Res (50,000).
  • Bonus Issue: 1 share for every 2 held (1:2).

Calculation:

  • Existing Shares: 10,000.
  • Bonus Shares: 10,000 / 2 = 5,000 Shares.
  • Value: 5,000 x ₹10 = ₹50,000.

Sources Utilized:

  1. CRR: 20,000 (Full)
  2. Sec Prem: 10,000 (Full)
  3. Gen Res: 20,000 (Balance needed)
  4. Total: 50,000.

Entry:

CRR A/c ...Dr                  20,000
Sec Premium A/c ...Dr          10,000
Gen Reserve A/c ...Dr          20,000
    To Bonus to Shareholders       50,000

Bonus to Shareholders ...Dr    50,000
    To Share Capital               50,000

Summary

  • Nature: Capitalisation of Reserves.
  • Cash Flow: No cash inflow/outflow.
  • Net Worth: Remains same (Reserves decrease, Capital increases).
  • Condition: Shares must be fully paid.

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