## Issue of Bonus Shares – Section 63

Bonus shares are fully paid-up shares issued by the company to existing shareholders free of cost, in proportion to their paid-up capital.

### Conditions for Issue

1. Authorised by AOA.

2. Authorised in general meeting on the recommendation of the Board.

3. No default in payment of interest or principal on fixed deposits or debt securities.

4. No default in payment of statutory dues of employees (e.g., PF, gratuity).

5. Bonus shares shall not be issued in lieu of dividend.

6. Partly paid-up shares existing at the time of bonus must first be made fully paid-up.

7. Once the Board's decision to issue bonus shares is announced, it cannot be withdrawn.

### Permitted Sources of Issue

Bonus shares may be issued only out of:

Free Reserves;
Securities Premium Account; or
Capital Redemption Reserve.

> Bonus shares cannot be issued by capitalising the Revaluation Reserve (reserves arising from revaluation of assets).

> Bonus shares cannot be issued out of Capital Reserve (only Capital Redemption Reserve is allowed).

Worked example

### Example 1

Example: R Ltd. decides to issue bonus shares in the ratio of 1 : 2 (1 bonus share for every 2 shares held). A shareholder holds 100 equity shares.

Solution: The shareholder will receive 50 bonus shares free of cost. Post-bonus, his holding will be 150 shares. He pays nothing for the additional 50 shares.

### Example 2

Example: S Ltd. has partly paid-up equity shares (₹10 paid on ₹100). It proposes to issue bonus shares using its free reserves. Can it do so?

Solution: No. The partly paid-up shares must first be made fully paid-up before bonus shares can be issued.

⚠️ Common exam mistakes

Confusing Capital Reserve with Capital Redemption Reserve — only the latter can be used.
Believing the Revaluation Reserve can fund bonus shares — it cannot.
Treating bonus shares as a substitute for dividend — expressly prohibited by Section 63(3).
Assuming the Board can withdraw a bonus issue once announced — it cannot.
Forgetting that partly paid-up shares must be made fully paid-up before bonus issue.

Bare-Act text Section 63 · Companies Act, 2013 · click to expand

Section 63(1): A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of— (i) its free reserves; (ii) the securities premium account; or (iii) the capital redemption reserve account: Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets.

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Issue of Bonus Shares [Section 63]

Worked example

⚠️ Common exam mistakes