Bonus shares are fully paid-up shares issued free of cost to existing shareholders in proportion to their existing holdings. Economically, the issue is a capitalisation of reserves – reserves are converted into share capital, without any cash flow.
## 1. Permissible Sources for Issue of Bonus Shares [Sec 63(1)]
Bonus shares may be issued only out of:
1. Free Reserves
2. Securities Premium Account (SPA / SP)
3. Capital Redemption Reserve (CRR)
> Important Exclusion:Revaluation ReserveCANNOT be used for issuing bonus shares.
## 2. Conditions for Issue of Bonus Shares [Sec 63(2)]
A company can issue bonus shares only if ALL the following conditions are met:
#
Condition
1
Issue is authorised by the Articles of Association (AOA)
2
Recommended by the Board and authorised in General Meeting (Ordinary Resolution)
3
No default in repayment of deposits or interest thereon
4
No default in repayment of debt securities (debentures/loans) or interest thereon
5
No default in payment of statutory dues of employees (PF, gratuity, bonus etc.)
6
Partly paid-up shares, if any, are made fully paid-up before the bonus issue
## 3. Other Important Rules
Rule 1 – No Withdrawal: Once the issue of bonus shares has been announced by the Board, it cannot be withdrawn.
Rule 2 – Not in Lieu of Dividend: Bonus shares cannot be issued in lieu of dividend. Bonus is a capitalisation of reserves; dividend is appropriation of profits – the two are not substitutes.
Example 1 – Sources: ABC Ltd. has Free Reserves ₹10 cr, Securities Premium ₹5 cr, CRR ₹3 cr and Revaluation Reserve ₹8 cr. Maximum amount available for bonus issue = 10 + 5 + 3 = ₹18 crore. Revaluation Reserve (₹8 cr) is NOT available.
### Example 2
Example 2 – Default Disqualification: XYZ Ltd. has not paid interest on its public deposits for the last 2 months. It cannot issue bonus shares until the default is cured – Condition 3 of Sec 63(2) is violated.
### Example 3
Example 3 – Partly Paid Shares: PQR Ltd. has 1 lakh equity shares of ₹10 each, on which ₹7 is called and paid. Before issuing bonus, PQR must first call up the remaining ₹3 and make these shares fully paid.
### Example 4
Example 4 – Withdrawal Not Allowed: On 1 April 2026, Board of MNO Ltd. announced 1:1 bonus. On 15 April, the Board changes its mind. Held: announcement cannot be withdrawn; the company is bound to proceed with the bonus issue.
⚠️ Common exam mistakes
Including Revaluation Reserve as a source – this is the most common mistake in MCQs and theory.
Mentioning Special Resolution – bonus issue only requires Ordinary Resolution (subject to AOA authorisation).
Forgetting the condition of 'no default in statutory dues of employees'.
Stating that bonus shares can be given instead of dividend to conserve cash – this is expressly prohibited.
Assuming partly paid-up bonus shares can be issued – bonus shares must always be fully paid-up.
Saying bonus once announced can be withdrawn by another Board resolution – it cannot.
Bare-Act text Section 63 · Companies Act, 2013 · click to expand
(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. (2) No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares under sub-section (1), unless— (a) it is authorised by its articles; (b) it has, on the recommendation of the Board, been authorised in the general meeting of the company; (c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it; (d) it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus; (e) the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up... (3) The bonus shares shall not be issued in lieu of dividend.