The issue of bonus shares is governed by three major regulations in India. The Companies Act, 2013 read with Companies (Share Capital and Debentures) Rules, 2014 states the procedure of issue of bonus shares. The text of Section 63 under CHAPTER-IV (Share Capital and Debentures) of the Companies Act, 2013 reads as follows:
“(1) A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of-
- Its free reserves;
- The securities premium account
- The capital redemption reserve account
Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets.
(2) No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares under sub-section (1), unless—
- it is authorised by its articles;
- it has, on the recommendation of the Board, been authorised in the general meeting of the company;
- it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;
- it has not defaulted in respect of the payment of statutory dues of the employees, such as contribution to provident fund, gratuity and bonus;
- the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up;
- it complies with such conditions as may be prescribed.
(3) The bonus shares shall not be issued in lieu of dividend.”
Company's (Share Capital and Debentures) Rules, 2014 gives the following provision regarding issue of bonus shares-
“Rule 14. The company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same”
Chapter IX of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR Regulations’) comprising of regulations 92 to 95 also regulate the issuance of bonus shares in listed companies. The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Third Amendment) Regulations, 2016 also govern the issue of bonus shares.
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