Bonus shares are the shares allotted to existing equity shareholders without any consideration being received from them, in cash or in kind. They are issued to capitalize profits of the company. Bonus shares can be issued only if Articles of Association permit such an issue.
SEBI Guidelines Regarding Issue of Bonus Shares:
SEBI has issued certain guidelines regarding issue of bonus shares.
The following is the effect of these guidelines on a listed company:
(i) The bonus issue can be made only out of free reserves built out of the genuine profits or securities premium collected in cash.
(ii) Reserves created by revaluation of fixed assets are not available for issue of bonus shares.
(iii) The bonus issue cannot be made unless the partly-paid shares, if any, existing, are made fully paid-up.
(iv) The declaration of bonus issue, in lieu of dividend, cannot be made.
(v) Once the company announces bonus issue after the approval of the Board of Directors, it must implement the proposal within a period of six months from the date of such approval and it does not have the option of changing the decision.
(vi) If the Articles of Association of the company does not already contain a provision for capitalisation of reserves, etc.; for issue of bonus shares, the company must pass a resolution at its general body meeting making provisions in the Articles of Association for capitalisation.
(vii) If consequent to the issue of bonus shares, the subscribed and paid-up capital exceeds the authorised share capital, the company has to pass a Resolution at its general body meeting for increasing the authorised capital.
(viii) No company can, pending conversion of FCDs/PCDs, issue bonus shares unless similar benefit is extended to the holders of such FCDs/PCDs through reservation of shares in proportion to such convertible part of FCDs and PCDs. The shares so reserved may be issued at the time of conversion of such debentures on the same terms on which the bonus issue was made.
(ix) The company issuing bonus shares must not have defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principle on redemption thereof. It also must have sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident find, gratuity, bonus, etc.
On issue of bonus shares, reserves used for such an issue are debited and Bonus to Equity Shareholders Account is credited with the amount for which bonus shares are issued. Then, Bonus to Equity Shareholders Account is debited and Equity Share Capital Account is credited with the amount of the issue.
Aggregate number and class of shares allotted as fully paid up by way of bonus shares have to be mentioned in the balance sheet for five years.
Ambitions Ltd. presents the following balance sheet to you:
The company purchases fresh machinery for Rs 1,25,000 for which it pays Rs 25,000 in cash and allots 1,000 14% Preference Shares of Rs 100 each as fully paid up to vendors. The company then issues one fully paid bonus equity share of Rs 10 each for every three equity shares held to its equity shareholders.
For this purpose, the balances in Profit & Loss Account and General Reserve are used to the necessary extent. You are required to pass journal entries for the above mentioned transactions and redraft the company’s balance sheet.
When a company which has already issued shares wants to make a further issue of shares, it is under a legal obligation to first offer the fresh issue to the existing shareholders unless the company has resolved otherwise by a special resolution. The right of the existing shareholder to buy shares from the company in this manner is transferable.
If the market price of the shares is higher than the amount at which the company has offered new shares, the right to buy shares from the company will carry a price. Suppose, a company offers to its equity shareholders the right to buy one equity share of Rs. 100 each at Rs. 120 for every four equity shares of Rs. 100 each held. Suppose, the market value of one equity share is Rs. 180.
Then, the value of the right will be calculated as follows:
It gives us the value of right attached to each share held. But in order to buy the share from the company, a person will have to buy 4 such rights because the company will issue one share against four shares held.