Section 63: Issue of Bonus Shares

This article mainly focuses on the provision related to issue of bonus shares by a company under section 63 of the companies act, 2013 which is read with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and further explained with landmark judgements.
Estimated Reading Time: 6 minutes

Introduction

Section 63 of Companies Act, 2013, part of chapter IV that sets forth the provisions with respect to share capital and debentures, lays down the provision of issue of bonus shares by a company. This is a new section under companies act, 2013. This section gives a right to any company to issue bonus shares to its members. This section has to be read with SEBI LODR and SEBI ICDR, as will be explained in this analysis, for its proper application. Bonus shares are the shares, which are issued to the existing members free of charge. They are always full paid of shares and differ from rights share as rights share only confers a privilege on the existing shareholders to have a claim on the shares offered after the first public issue. This analysis will briefly explain the nitty gritties with respect to bonus shares.

Purpose of Section 63

This section under the act, 2013 is quite brief and lay downs the following points:

a) According to this section a company can issue fully paid-up bonus shares to its members out of free reserves, securities premium account or capital redemption reserve account.

b) Bonus shares cannot be issued by capitalizing reserves created out of revaluation of assets.

c) Issue of bonus shares by capitalizing profits or reserves can be made if following is fulfilled: (1) Articles of association permits it (2) board and shareholders approve such issue (3) the company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it (4) the company has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity and bonus (5) the outstanding partly paid-up shares are made full paid-up.

d) Bonus shares will not be issued in lieu of dividend.

The provisions relating to further issuance of share capital including preferential and bonus issue is applicable for private companies also. Issue of bonus shares by listed companies is governed by the provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 from regulations 92 to 95 of chapter IX of this regulation. 

This section must be read with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The important points are as follows:

a) The listed entity shall give prior intimation of Board meeting at least two working days in advance, excluding the date of the intimation and date of the meeting regarding proposal for declaration of bonus securities where such proposal is communicated to the Board of directors of the listed entity as part of the agenda papers.

b) In case the declaration of bonus by the listed entity is not on the agenda of the meeting of the Board of directors, prior intimation is not required to be given to the stock exchange(s)[1].

c) The listed entity has to disclose to the exchange within 30 minutes of the closure of the Board meeting on the decision with respect to increase in capital by issue of bonus shares through capitalization including the date on which such bonus shares shall be credited/dispatched[2].

d) The listed entity has to give notice in advance of at least seven working days (excluding the date of intimation and the record date) to stock exchange(s) of record date for the issue of bonus shares[3].

This section also must be read with Companies (Share Capital and Debentures) Rules, 2014 for its proper application. It lays down that the company, which has once announced the decision of its Board recommending a bonus issue, should not subsequently withdraw the same[4].

Situation Before Enactment of Section 63

The provisions in relation to issuance of bonus shares have now been specifically provided under the new act, 2013 which was under the old act, 1956 was mentioned under table A and proviso of section 205(3) of the old act. The present section is more specific and clearer and states the requirements of issue of bonus shares more holistically. Prior to the act, 2013 bonus shares were governed by SEBI guidelines or regulations.

Application of Section 63

This section basically comes into application when a company wants to issue bonus shares to its members. This can be done by a company having a high cash reserve that wants to capitalize its liquid assets by converting it into equity.

Cases at a Glance

Following are the cases pertaining to this section:

  • Bhagwati Developers v. Peerless General Finance and Investment Co.[5]: In this case the court held that a company could issue bonus shares by capitalization of revaluation reserves, if the articles so permit. In order to overcome this Bhagwati decision, section 63 provides that no issue of bonus shares shall be made by capitalizing reserves created by revaluation of assets.
  • Sudhir Menon HUF v. ACIT[6]  : In this case the court investigated the tax liability of the bonus shares issued to the members of a company. The court in this case held that section 56(2) of Income tax act will not be applicable to bonus shares as in their issuance there is only capitalization of profits and neither there is increase or decrease of the wealth of the shareholder. Bonus shares would be subject to capital gain tax depending on the holding period only when sold.
  • Hunsur Plywood Works Ltd. v. CIT [7] : In this case the court held that when a company used its development rebate fund for issuing bonus shares there will be no disbursement of money and the company will remain entitled to development rebate.
  • Rajiv Nag v. Quality Assurance Institute (India) Ltd.[8]: In this case a resolution was passed at a meeting of the company for issue of bonus shares to equity shareholders. The directors of the company were authorized to decide the date of issue. A shareholder transferred his shares after the meeting but before the date specified by the directors. It was held by court that he is no longer a shareholder at the date of issue, he would not be entitled to the bonus shares in respect of the shareholding, which has already been transferred. There is no right to bonus unless the name of the shareholder is still present in the register of members of the company. 
  • Standard Chartered Bank v. Custodian[9]: In this case court discussed the concept of bonus shares in detail and held that bonus share is a property which comes into existence with an identity and value of its own and capable of being bought and sold as such. The court held that a bonus share is an accretion and described as a distribution of capitalized undivided profit.
  • CIT v. Chunnilal Khushaldas[10]: This case is important as it laid down that bonus shares cannot be issued as securities.

Concluding Summary

This section is a very important section laying down the requirements of issue of bonus shares by a company to its members according to the number of shares owned by such members. This transaction basically capitalizes a part of reserves of the company and transfers it to its equity capital. This can be looked as giving the loyal members a reward for their continued participation and faith in the company. Issuance of bonus shares is looked as a strong success signal of the company.


[1] SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, r. 29 (SEBI).

[2] SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Sch. III (A) (SEBI).

[3] SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, r. 42 (SEBI).

[4] Companies (Share Capital and Debentures) Rules, 2014, r. 14 (MCA).

[5] Bhagwati Developers v. Peerless General Finance and Investment Co. (2005) 69 CLA 288 (SC).

[6] Sudhir Menon HUF v. ACIT: 162 TTT 425.

[7] Hunsur Plywood Works Ltd. v. CIT (1998) 1 SCC 355.

[8] Rajiv Nag v. Quality Assurance Institute (India) Ltd. (2001) 105 CompCas 178.

[9] Standard Chartered Bank v. Custodian (2000) 6 SCC 427.

[10] CIT v. Chunnilal Khushaldas (1974) 93 ITR 369.

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