# Issue of Bonus Shares — Section 63
## What are Bonus Shares?
The term 'bonus share' is not defined in the Companies Act, 2013. In commercial parlance, bonus shares are shares issued proportionately by a company to its current shareholders as fully paid-up shares, free of cost.
The characteristics, conditions, and manner of issue are governed by Section 63.
## Permitted Sources [Section 63(1)]
A company may issue fully paid-up bonus shares to its members out of:
| Permitted Sources | Prohibited Source |
|---|---|
| Free Reserves (other than revaluation reserve) | Reserves created by revaluation of assets |
| Securities Premium Account | |
| Capital Redemption Reserve |
> Proviso to Section 63(1): Bonus shares shall NOT be issued by capitalising reserves created by the revaluation of assets.
## Pre-requisites for Issue [Section 63(2)]
A company can capitalise its profits/reserves for issuing fully paid-up bonus shares only if ALL of the following are satisfied:
1. Authorised by Articles of the company.
2. Authorised in general meeting on the recommendation of the Board.
3. No default in payment of interest or principal in respect of fixed deposits or debt securities issued by it.
4. No default in payment of statutory dues of employees — e.g., PF contribution, gratuity, bonus.
5. Partly paid-up shares outstanding on the date of allotment have been made fully paid-up.
6. Compliance with Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014 — once the Board announces a bonus issue, it cannot subsequently withdraw the decision.
## Important Restrictions
- Section 63(3): Bonus shares shall not be issued in lieu of dividend. Bonus issue and dividend are distinct corporate actions and cannot be substituted.
- Proviso to Section 123(5) confirms: a company may capitalise its profits/reserves for issuing fully paid bonus shares or paying up any amount unpaid on shares held by members.
## Conceptual Anchor
A bonus issue does NOT bring in fresh cash — it merely converts reserves/securities premium/CRR into share capital. Hence the strict conditions and the prohibition on revaluation reserve (which itself reflects an unrealised, non-cash increase in asset value).