(2) When there is a big gap between the paid-up capital and the capital actually employed in the business of account of huge reserves, it is thought proper to issue Bonus Shares and, thus to fill up the gap.

(3) Payment of dividend at a high rate is possible if there are excessive divisible profits with the company. This attracts the competitors in the business. Thus, Bonus Shares are issued to reduce the rate of dividend and to regularize it from year to year.

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(4) A high rate of dividend paid to the shareholders is usually resented by the employees and customers. Hence, Bonus Shares are issued and the rate of dividend is kept down.

It is thus seen that the issue of Bonus Shares is a good method of capitalizing large profits or reserves. The following points have to be noted:

(i) The issue of Bonus Shares increases the volume of the Share Capital of a company. It should be seen that the profits are enough so as to enable the company to pay the same rate of dividend.

(ii) There should be a sufficient number of unissued shares for allotment as Bonus Shares. Only then, Bonus Shares can be issued.

(iii) If there is no unissued Share Capital, a resolution altering the Memorandum and Articles of Association should be passed so as to enable the company to increase the authorized capital of the company.

(iv) For making payment of dividend otherwise than in cash, Articles will have to be altered to enable the company to do so.

Bonus Shares are issued to all the existing shareholders in their shareholding proportion.

Revised Guidelines for Issue of Bonus Shares. Under the Capital Issues (Control) Act, 1947, all the companies are required to obtain the approval of the Controller of Capital Issues for issue of Bonus Shares.

The revised guidelines for the examination of such applications are given below while seeking approval under the Capital Issue (Control) Act, 1947: Exemption limit has been raised for Capital Issue – Capital Issue (Exemption) order for Rs. 50 lakhs has been raised to Rs. 1 crore by Controller of Capital Issues.

1. For capitalisation of reserves etc. to issue Bonus Shares, there should be a specific provision in the Articles of Association. If it is not there, a resolution should be passed at the General Body Meeting to make such a provision in the Articles.

2. If the issue of Bonus Shares leads to an increase in the authorised capital and subscribed and paid-up capital exceeds the authorized capital, a resolution should be passed at the General Body Meeting to that effect.

3. Before making an application to the Controller of Capital Issues, the company should furnish a resolution passed at the General Meeting for Bonus Shares. In the resolution, the management’s resolution in regard to the rate of dividend to be declared in the year immediately after the bonus issue should be indicated.

4. The Bonus Shares can be issued out of the reserves built out of genuine profits or the share premium collected in cash only.

5. Reserves made out of the revaluation of fixed assets are not permitted for capitalisation for this purpose.

6. Development Rebate Reserve/Investment Allowance Reserve is considered as free reserve for the purpose of calculation of residual reserves test.

7. All contingent liabilities disclosed in the audited accounts having a bearing on the net profits shall be taken into account in the calculation of the minimum residual reserves.

8. The volume of residual reserves after the proposed capitalisation should be at least 40 percent of the increased paid-up capital.

9. Thirty percent of the average profits before tax of the company for the previous three years should yield a rate of dividend on the expanded capital base of the company at 10 percent.

10. The declaration of bonus issue in lieu of dividend is not allowed.

11. Further application for issue of Bonus Shares by a company is permitted only after 36 months from the date of sanction of an earlier bonus issue, if any, by the Government. (Now only after 24 months from the date of previous sanction). (CCI) (ii)/86 dated 26.12.86

12. Bonus issues are not permitted unless existing partly paid shares are made fully paid-up.

13. No bonus issue is permitted if there is reason to believe that the company is in default in respect of the payment of statutory dues of employees, e.g., contribution to provident fund, gratuity, bonus etc.

14. Capital reserves arising as a result of revaluation of assets or without accrual of cash resources will neither be allowed to be capitalised nor taken into account in the computation of the residual reserves of 40 percent for the purpose of bonus issue.

15. The total amount permitted to be capitalised, for issue of Bonus Shares out of free reserves at one time shall not exceed the total amount of paid-up equity of the company.

As per Revised Guidelines issued on 18.3.85, the proviso added is that the relaxation can be considered on merits in respect of unlisted Non-FERA companies which have been in existence for more than 10 years or which have been making profits for last 5 years prior to the year in which they seek listing under the Securities Contracts (Regulation) Rules, 1957. This relaxation on case by case would, however, be available to closely held companies till 31.3.86.

16. Application for issue of Bonus Shares should be made within one month of the announcement of bonus by the Board of Directors of the company.

17. In cases where there is default ia the payment of any term loans outstanding to any public financial institution, a no-objection letter from that institution in respect of the issue on Bonus Shares should be furnished by the companies concerned with the application for bonus Issue.

All applications for bonus issue should be signed by a person not below the rank of director/secretary together with a certificate indicating that the information furnished is true and correct and that all the data required in the application form and prescribed in the guidelines have been furnished.

The applications should be accompanied by a certificate from the auditors indicating that these guidelines have been fully met and that the data given in the applications are true and correct to the best of their knowledge.