## SEBI Regulations for Issue of Bonus Shares

Bonus shares are free additional shares given to existing shareholders. SEBI prescribes strict conditions to prevent misuse.

### Conditions under SEBI Regulations

#	Condition	Detail
1	Source of Issue	Only from free reserves or cash premium (securities premium)
2	Partly-Paid Shares	All partly-paid shares must be fully paid up before bonus issue
3	No Default	Company must have no default in repayment of loans or payment of dues
4	Not a Substitute	Bonus shares cannot be issued in lieu of dividend
5	Implementation Timeline	Must be implemented within 6 months of board/shareholder approval
6	Approval Timeline	Board approval: 15 days; Shareholder approval: 2 months

### Key Logic

Why only free reserves? Bonus shares are capitalization of profits/reserves. Using borrowed funds would inflate capital artificially.
Why not in lieu of dividend? Dividend is a return of cash; bonus is capitalization — they serve different purposes and shareholders cannot be misled.
Why fully paid shares first? Issuing bonus on partly-paid shares would be unfair and create unequal treatment among shareholders.

Worked example

### Example 1

Q: XYZ Ltd. wants to issue bonus shares. It has outstanding partly-paid shares and has defaulted on a bank loan. Can it proceed? Give reasons.

A: No, XYZ Ltd. cannot proceed with the bonus issue for two reasons:

1. It has partly-paid shares outstanding — SEBI requires all shares to be fully paid before a bonus issue.

2. It has defaulted on a bank loan — SEBI prohibits bonus issues when there is any default in loan repayment.

Both conditions are independently disqualifying.

### Example 2

Q: A company's board approves a bonus issue on 1st January. By when must it be implemented? When can shareholders approve it?

The bonus issue must be implemented within 6 months of approval, i.e., by 30th June.
Board must approve within 15 days of the proposal.
Shareholders can approve within 2 months of the board decision.

⚠️ Common exam mistakes

Stating bonus shares can be issued from any reserves – they can only be issued from FREE reserves or cash (securities) premium, not revaluation reserves.
Forgetting the 'no default' condition – this is frequently tested and often overlooked.
Confusing the timelines: 15 days = board approval timeline; 2 months = shareholder approval; 6 months = implementation deadline.
Saying bonus shares can substitute dividend – SEBI explicitly prohibits this.

Bare-Act text Bonus Issue Conditions · SEBI (Issue of Capital and Disclosure Requirements) Regulations · click to expand

Bonus shares shall be issued only out of free reserves or share premium collected in cash. No company shall, pending conversion of FCDs/PCDs, issue any shares by way of bonus unless similar benefit is extended to holders of such FCD/PCD. The company has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption thereof and has not defaulted in respect of the payment of statutory dues of the employees. The declaration of bonus issue, in lieu of dividend, is not made.

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