A profitable company sitting on large reserves wants to reward shareholders and signal strength without spending cash. A bonus issue does exactly that: it capitalises reserves into new fully paid-up shares handed to existing members in proportion to what they hold, for free. What catches companies out is the eligibility, because Section 63 names precisely which reserves qualify — and once the board recommends and members approve, the issue cannot be withdrawn.
Bonus shares may be issued only from free reserves, the securities premium account or the capital redemption reserve, never from reserves created by revaluing assets.
The bottom line
Sources: free reserves, the securities premium account, or the capital redemption reserve. Nothing created by revaluing assets.
Conditions: authorised by the Articles, approved in general meeting on the Board's recommendation, no defaults on deposits, debt securities or statutory employee dues, and partly paid shares made fully paid.
Two hard rules: bonus shares cannot be issued in lieu of dividend, and a recommended bonus issue cannot be withdrawn.
What a bonus issue is
The issue of fully paid-up shares to existing members, free of cost, by capitalising the company's profits or reserves under Section 63.
It is a book entry made real. Reserves move into the share capital account and members receive additional shares in proportion to their existing holding. The shareholder's total value does not jump — they own more shares of the same company — but the share count rises and reserves convert into permanent capital.
What it buys is a signal of financial strength and better liquidity in the share, without any cash leaving.
Which reserves qualify
Under Section 63(1), bonus shares may be issued only out of free reserves, meaning unrestricted distributable profits; the securities premium account; or the capital redemption reserve account.
Reserves created by the revaluation of assets cannot be capitalised for a bonus issue. That bar is deliberate: revaluation gains are unrealised paper increases, and the law will not let a company hand out shares backed by notional value rather than genuine surplus.
The conditions to clear first
Section 63(2) requires all of the following before reserves can be capitalised.
- The Articles authorise a bonus issue. Amend them first if they do not.
- It is recommended by the Board and approved in general meeting.
- There is no default in payment of interest or principal on fixed deposits or debt securities.
- There is no default in statutory employee dues — provident fund, gratuity, bonus.
- Any partly paid-up shares outstanding are made fully paid up.
Run these checks before the Board recommends rather than after. Once the Board has recommended and the general meeting has authorised it, the company cannot withdraw the issue — and by then the announcement has gone out and shareholders are expecting their shares.
The process and filings
- Confirm sufficient eligible reserves and that every Section 63(2) condition is met.
- Board meeting to recommend the issue, fix the ratio and record date, and call the general meeting.
- General meeting where members approve the capitalisation.
- Board meeting to allot the bonus shares.
- File Form PAS-3 within 30 days of allotment under Section 39, issue certificates within 2 months, and update the Register of Members.
Listed companies also follow the SEBI ICDR timelines for completing the issue after approval.
Bonus issue and dividend are not interchangeable
A dividend is a cash distribution of profits. A bonus issue is a capitalisation of reserves into shares.
Section 63(3) bars issuing bonus shares in lieu of dividend, which closes the obvious temptation: dressing up a skipped dividend as a bonus so the announcement reads better. The dividend rules are separate and stay separate.
A worked example
A company with ₹1 crore of paid-up equity and ₹3 crore in free reserves declares a 1:1 bonus, one free share for each held.
It first confirms the Articles permit it, that there is no default on its term loan or employee dues, and that no partly paid shares are outstanding. The Board recommends and members approve in general meeting. The company capitalises ₹1 crore of free reserves into share capital, allots the bonus shares, files PAS-3 within 30 days and issues certificates.
Paid-up capital doubles to ₹2 crore, reserves fall by ₹1 crore, no cash leaves the company, and every shareholder's percentage stake is exactly what it was.
Common mistakes
- Using revaluation reserves, which is barred outright.
- Ignoring the no-default conditions. An outstanding default on deposits, debt securities or employee dues blocks the issue.
- Leaving partly paid shares outstanding, which must be made fully paid first.
- Trying to withdraw after the announcement. A recommended and approved bonus issue cannot be reversed.
- Using bonus shares as a dividend substitute, which Section 63(3) prohibits.
A working routine
- Confirm the Articles authorise a bonus issue, and amend them if needed.
- Verify the eligible reserves, and confirm none of them arose from revaluation.
- Confirm there is no default on deposits, debt securities or statutory employee dues.
- Make any partly paid shares fully paid.
- Board recommendation, then general meeting approval, then allotment.
- File PAS-3 within 30 days, issue certificates within 2 months, update the register.
Frequently asked questions
Can a company issue bonus shares from revaluation reserves? No. Only free reserves, the securities premium account and the capital redemption reserve qualify.
Do shareholders pay for bonus shares? No. They are issued free, by capitalising the company's own reserves.
Can a bonus issue be withdrawn once announced? No. Once recommended by the Board and approved by members it cannot be withdrawn, which is why the checks come first.
Can bonus shares replace a dividend? No. Section 63(3) prohibits issuing them in lieu of dividend.
What is filed after allotment? Form PAS-3, within 30 days.
Does a bonus issue make shareholders better off? Not directly. They hold more shares in the same company, so the percentage stake and the underlying value are unchanged. What changes is the capital structure and the liquidity of the share.
Primary sources
- Section 63, Companies Act, 2013, including 63(1), 63(2) and 63(3)
- Section 39 and Rule 14, Companies (Share Capital and Debentures) Rules, 2014
- SEBI (ICDR) Regulations for listed companies