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A bonus issue rewards existing shareholders with extra fully paid-up shares, funded entirely from the company's own reserves. No one pays anything — but the sources and conditions are strictly drawn.

Permitted sources: free reserves, securities premium, capital redemption reserve. Never from revaluation reserves.

A profitable company sitting on large reserves wants to reward shareholders and signal strength without depleting cash. A bonus issue does exactly that — it capitalises reserves into new fully paid-up shares, handed to existing members in proportion to their holdings, for free. The shareholder's total value doesn't jump (they own more shares of the same company), but their share count rises and the company's reserves convert into permanent capital.

The catch is in the eligibility. Section 63 lists precisely which reserves you may use and a set of clean-conduct conditions you must meet first — and once the board recommends and members approve, you can't change your mind.

BOTTOM LINE

  • Sources: Free reserves, the securities premium account, or the capital redemption reserve — and 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; partly paid shares made fully paid.
  • Key rule: Bonus shares can't be issued in lieu of dividend, and a recommended bonus issue can't be withdrawn.

What is a bonus issue?

Governs this section: Section 63, Companies Act, 2013

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. It's a book entry made real: reserves move into the share capital account, and members receive additional shares in proportion to what they already hold. It rewards shareholders, signals financial strength, and improves the share's liquidity — without touching cash reserves.

Which reserves you can use — and can't

Governs this section: Section 63(1)

Bonus shares may be issued only out of:

  • free reserves (unrestricted, distributable profits);
  • the securities premium account; or
  • the capital redemption reserve account.

CAUTION — the revaluation bar

Reserves created by the revaluation of assets cannot be capitalised for a bonus issue. This is deliberate: revaluation gains are unrealised, paper increases, and the law won't let a company hand out shares backed by notional value rather than genuine surplus.

The conditions you must clear first

Governs this section: Section 63(2)

Before capitalising reserves, the company must satisfy all of these:

  1. The Articles authorise a bonus issue (amend them first if not).
  2. It's recommended by the Board and approved in general meeting.
  3. No default in payment of interest or principal on fixed deposits or debt securities.
  4. No default in statutory employee dues — PF, gratuity, bonus.
  5. Any partly paid-up shares outstanding are made fully paid-up.

PRACTITIONER'S NOTE

Once the Board recommends a bonus issue and it's authorised in the general meeting, the company cannot withdraw it. So run the source and condition checks before the Board recommends — not after the announcement has gone out and shareholders are expecting their shares.

The process and filings

Governs this section: Section 63 & Section 39

  1. Confirm sufficient eligible reserves and that all Section 63(2) conditions are met.
  2. Board meeting: recommend the bonus issue, fix the ratio and record date, call the general meeting.
  3. General meeting: members approve the capitalisation.
  4. Board meeting: allot the bonus shares.
  5. File Form PAS-3 within 30 days of allotment; issue certificates within 2 months; update the Register of Members.

(Listed companies also follow SEBI ICDR timelines for completing the bonus issue after approval.)

Bonus issue vs dividend

Governs this section: Section 63(3)

The two are deliberately kept distinct. A dividend is a cash distribution of profits; a bonus issue is a capitalisation of reserves into shares. The Act bars issuing bonus shares in lieu of dividend — you can't dress up a skipped dividend as bonus shares. They serve different purposes and follow different rules.

Worked example

Mini-case — a 1:1 bonus from reserves

A company with ₹1 crore 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 it has no default on its term loan or employee dues, and that no partly paid shares are outstanding. The Board recommends; 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 unchanged.

Common mistakes

  1. Using revaluation reserves. Strictly barred — only free reserves, securities premium and capital redemption reserve qualify.
  2. Ignoring the no-default conditions. Outstanding deposit/debt-security or employee-dues defaults block the issue.
  3. Leaving partly paid shares. These must be made fully paid before the bonus issue.
  4. Trying to withdraw after announcement. A recommended-and-approved bonus issue can't be reversed.
  5. Using bonus shares as a dividend substitute. Expressly prohibited.

Checklist

  1. Confirm the Articles authorise a bonus issue (amend if needed).
  2. Verify eligible reserves (free reserves / securities premium / CRR) — not revaluation reserves.
  3. Confirm no default on deposits, debt securities or statutory employee dues.
  4. Make any partly paid shares fully paid.
  5. Board recommendation → general-meeting approval → allotment.
  6. File PAS-3 within 30 days; issue certificates within 2 months; update the register.

FAQ

Can a company issue bonus shares from revaluation reserves? No. Reserves created by revaluation of assets cannot be used. Only free reserves, securities premium and the capital redemption reserve qualify.

Do shareholders pay for bonus shares? No. They're issued free, by capitalising the company's reserves.

Can a bonus issue be withdrawn once announced? No. Once recommended by the Board and approved by members, it can't be withdrawn — so run all checks beforehand.

Can bonus shares replace a dividend? No. Section 63 prohibits issuing bonus shares in lieu of dividend.

What's filed after allotment? Form PAS-3 within 30 days of allotment.

Primary sources

  • Section 63, Companies Act, 2013 (incl. 63(1), 63(2), 63(3))
  • Section 39 & Rule 14, Companies (Share Capital and Debentures) Rules, 2014
  • SEBI (ICDR) Regulations — for listed companies

Disclaimer: This article is general information on a fast-changing area of company law, current at the time of writing. It is not legal or professional advice for any specific company. Verify the position against the live MCA rules and consult your company secretary before filing.