Imagine Rajesh & Co. Pvt. Ltd. has been doing well for years, accumulated massive free reserves, but doesn't want to pay out cash dividends. Instead, it rewards shareholders by giving them extra shares — for free. That's a bonus issue: converting accumulated profits/reserves into share capital and handing out fully paid-up shares to existing members at no cost.
Section 63 lays down exactly where these bonus shares can come from and what conditions the company must satisfy before issuing them. Bonus shares can only be issued out of three sources: (i) free reserves (like retained earnings sitting in the P&L), (ii) the securities premium account (money collected over and above the face value of shares), or (iii) the capital redemption reserve account (created when preference shares or buybacks happen). Here's the critical rule that trips everyone up — revaluation reserves are strictly off-limits. If a company revalued its land from ₹50 lakh to ₹2 crore and created a revaluation reserve of ₹1.5 crore, it cannot use that reserve for a bonus issue. This is because that reserve doesn't represent real earned profits — it's just a paper gain.
Before the board can go ahead, a checklist of six pre-conditions must be satisfied: (a) the Articles of Association must authorise it; (b) the Board recommends it and members approve it in a general meeting; (c) the company must not have defaulted on fixed deposits or debt securities (interest or principal); (d) no default in statutory dues like PF, gratuity, or bonus of employees; (e) all partly paid-up shares must be made fully paid-up before allotment; and (f) any other SEBI/MCA prescribed conditions must be met. One more absolute rule: bonus shares cannot be issued in lieu of dividend — you can't substitute cash dividends with bonus shares. Both serve different purposes and the law keeps them separate. This section is asked frequently as a 4-mark or 5-mark question — expect either a conditions-list question or a source-identification scenario.
Example 1 — Identifying valid sources
The balance sheet of Meera Textiles Ltd. shows the following:
- Free Reserves: ₹80,00,000
- Securities Premium Account: ₹30,00,000
- Capital Redemption Reserve: ₹10,00,000
- Revaluation Reserve: ₹25,00,000
The company wants to issue bonus shares of ₹1,20,00,000. Can it do so, and from which sources?
Working:
Step 1 — Identify eligible sources under Sec 63(1):
- Free Reserves: ₹80,00,000 ✓
- Securities Premium: ₹30,00,000 ✓
- Capital Redemption Reserve: ₹10,00,000 ✓
- Revaluation Reserve: ₹25,00,000 ✗ (expressly prohibited by proviso to Sec 63(1))
Step 2 — Total eligible pool = ₹80,00,000 + ₹30,00,000 + ₹10,00,000 = ₹1,20,00,000
Answer: Yes, Meera Textiles can issue bonus shares of ₹1,20,00,000 using all three eligible sources. The revaluation reserve of ₹25,00,000 cannot be used.
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Example 2 — Pre-conditions checklist (exam-style scenario)
Sunrise Pharma Ltd. wants to issue bonus shares. It has authorisation in its Articles. The Board has recommended the issue and shareholders approved it in an EGM. However, it has 50,000 partly paid-up shares (₹10 face value, ₹6 paid-up) outstanding. It has also not deposited PF contributions for the last two months.
Working:
Check each condition under Sec 63(2):
- (a) Articles authorise? ✓
- (b) Board recommendation + GM approval? ✓
- (c) Default on fixed deposits/debt? Not mentioned — assume ✓
- (d) Default on statutory dues (PF)? ✗ — PF not deposited for 2 months
- (e) Partly paid-up shares fully paid before allotment? ✗ — ₹4 per share still unpaid on 50,000 shares = ₹2,00,000 unpaid
Answer: Sunrise Pharma Ltd. CANNOT issue bonus shares right now. It must first clear the PF dues and either collect the remaining ₹4 per share or forfeit/cancel the partly paid-up shares before proceeding.
📖 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; (f) it complies with such conditions as may be prescribed. (3) The bonus shares shall not be issued in lieu of dividend.