Capitalisation:
Capitalisation of profits is the process of converting profits or reserves into paid up capital.
Bonus Shares: A bonus share is a free share issued without any consideration to an existing shareholder in the ratio of number of shares held by that shareholder.
Issue of Bonus share —
• decreases the Reserve & Surplus;
• Increases the issued capital but does not bring any change in cash flow and net worth.
Way to capitalize profits or reserves:
(a) by paying up amounts unpaid on existing partly paid shares so as to make them fully paid up shares, or
(b) by issuing fully paid bonus shares to the existing members.
Sources for fully paid-up bonus shares [Sec 63]
As per Sec 63(1), a company may issue fully paid-up bonus shares to its members out of-
Ø Its Free Reserves
Ø Its Secutiries Premium Account; or
Ø Its Capital Redemption Reserve Account
Restrictions —
• No issue of bonus shares shall be made by capitalising reserves created by the Revaluation of Assets i.e. Revaluation Reserves.
Meaning of Free Reserves: As per Sec 2(43) of the Companies Act, 2013, “Free Reserves” mean such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend.
Exclusions from Free Reserves:
• Any amount representing unrealised gains, notional gains or revaluation of assets, where shown as a reserve or otherwise, or
• Any change in carrying amount of an asset or of a liability recognised in equity, including surplus in Profit and Loss Account on measurement of the Asset or the Liability at Fair Value.
Conditions for issue of fully paid-up bonus shares [SEC 63(2)]
Ø A company can issue bonus shares if its Articles expressly authorise to do so.
Ø A resolution is required to be passed by the Board of Directors recommending its decision to issue bonus shares.
Ø A resolution is required to be passed by the members in the general meeting to approve the Board’s resolution recommending the issue of bonus shares.
Members’ resolution —
v Must have an intention to capitalize the profits or reserves, and
v Must mention the amount of profits or reserves to be capitalized.
Ø The company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it.
Ø The Company has not defaulted in respect of payment of statutory dues of the employees such as contribution to provident fund, gratuity and bonus.
Ø The partly-paid shares, if any, outstanding on the date of allotment are made fully paid-up.
Ø A Company must comply with Prescribed Conditions.
The bonus shares shall not be issued in lieu of dividend.
