BONUS SHARES

INTRODUCTION TO BONUS SHARES

The word Bonus means to pay extra due to good PERFORMANCE.

Bonus paid to shareholders can either be 1.Cash bonus 2.Capital bonus

1. Cash bonus: it is paid to shareholders only when the company has larger reserves and sufficient cash to pay bonus. It is also seen that the payment of cash bonus does not affect the working capital of the company2. Capital bonus : it is paid when the company wants to share the accumulated reserves with the shareholders but it is not in a position to pay cash bonus because it adversely affects the working capital of the company. Capital bonus is given by making partly paid shares as fully paid shares without getting cash from the shareholders or it is given by the issue of free fully paid shares known as bonus shares

When Bonus shares can be issued

following are the circumstances that warrant the issue of bonus shares :1.When a company has accumulated large reserves (capital or revenue) and it wants to capitalize these reserves by issuing bonus shares

2. When the company is not in a position to give cash bonus because it adversely affects its working capital .

3.When the value of fixed assets far exceeds the amount of capital.4.When the higher rate of dividend is not advisable for the distribution of the accumulated reserves because shareholders will demand the same rate of dividend in future which may not be possible.5.When there is a big difference between the market value and paid up value of shares of the company

Provisions of companies Act 1956

Sec 205 (3) : it provides that a company may capitalize its profits or reserves for the purpose of issuing fully paid bonus shares or pay up any amount, for the time being un paid, or any shares held by the members of the company

Sec 78 (2) : the securities premium may be applied in paying up un issued shares of the company to be issued to members of the company as fully paid bonus shares

Sec 80 (5) : it provides that the capital redemption reserve account may be applied by the company in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares

GUIDELINES ISSUED BY SEBI 1. The company has to issue a certificate countersigned by the statutory auditor to the effect that the terms and conditions for issue of bonus shares have been complied out.

2. The issue will not dilute the value or right of the holders of partly or fully convertible denbentures.

3. The bonus issue is made out of free reserves built of genuine profits or share premium collected in cash only.

4. Reserves created by revaluation of assets are not capitalized.

5. The bonus issue is not made unless the partly paid shares, if any are made fully paid.

6. There is a provision in the article of association for capitalization of reserves and if not, the company should pass resolution making the provision in AOA of company

7. The company must implement the proposal within six months from the date of approval, of the board of directors.

company to be issued to members of the company as fully paid bonus shares

FREE RESERVES THAT CAN BE USED FOR BONUS ISSUE

1.SURPLUS IN P&L A/C2.GENERALRESERVES3.DIVIDEND EQUALISATION RESERVE4.CAPITALRESERVE ARISING FROMPROFIT ON SALE OF FIXED ASSETS RECEIVED IN CASH5.BALANCE IN DEBENTURE REDEMPTION RESERVE AFTER REDEMPTION OF DEBENTURE.6.CAPITAL REDEMPTION RESERVE A/C CREATED AT THE TIME OF REDEMPTION OF REDEEMBLE PREFERENCE SHARES OUT OF THE PROFITS7.SECURITIES PREMIUM COLLECTED IN CASH ONLY

RESERVES NOT AVAILABLE FOR ISSUE

1.CAPITAL RESERVE ARISING DUE TO REVALUATION OF ASSETS.2.SECURITIES PREMIUM ARISING ON ISSUE OF SHARES ON AMALGAMATION OR TAKE OVER3.INVESTMENT ALLOWANCE RESERVE /DEVELOPMENT REBATE RESERVE BEFORE EXPIRY OF 8 YEARS OF CREATION4.BALANCE IN DEBENTURE REDEMPTION RESERVE A/C BEFORE REDEMPTION TAKES PLACE5.SURPLUS ARISING FROM A CHANGE IN THE METHOD OF CHARGING DEPRECIATION

ACCOUNTING TREATMENTA) IFTHE BONUS IS UTILISED FOR MAKING PARTLY PAID SHARES AS FULLY PAID SHARES1) PROFITAND LOSS A/C Dr (OR) GENERAL RESERVE A/C Dr (OR) CAPITAL RESERVE A/C Dr TO BONUS TO SHAREHOLDERS A/C{BEING AMOUNT TRANSFERRED TO BONUS TO SHAREHOLDERS A/C}

2. SHARE FINALCALLA/C Dr TO SHARE CAPITAL A/C{ BEING FINAL CALL DUE ON SHARES}

3. BONUS TO SHAREHOLDERS A/C Dr TO SHARE FINAL A/C{ BEING THE BONUS TO SHAREHOLDERS UTILZED TOWARDS SHARE FINAL CALL A/C}

B. FOR ISSUING FULLY PAID BONUS SHARES• 1. PROFIT AND LOSS A/C Dr• (OR) GENERAL RESERVE A/C Dr• (OR) CAPITAL RESERVE A/C Dr

(OR) SECURITIES PREMIUM A/C Dr (OR) CAPITAL REDEMPTION RESERVE A/C Dr (OR) ANY OTHER RESERVE A/C Dr TO BONUS TO SHAREHOLDERS A/C{BEING THE P&L A/C AND RESERVES TRANSFER TO BONUS TO

SHAREHOLDERS A/C} 2. BONUS TO SHAREHOLDERS A/C Dr TO SHARE CAPITAL A/C TO SECURITIESPERMIUM A/C{BEING THE ISSUE OF BONUS SHARES}

Definition of 'Debenture Redemption Reserve'

A provision that was added to the Indian Companies Act of 1956 during an amendment in the year 2000. The provision states that any Indian company that issues debentures must create a debenture redemption service to protect investors against the possibility of default by the company

Under the provision, debenture redemption reserves will be funded by company profits every year until debentures are to be redeemed. If a company does not create a reserve within 12 months of issuing the debentures, they will be required to pay 2% interest in penalty to the debenture holders. Only debentures that were issued after the amendment in 2000 are subject to the debenture redemption service.

Capital redemption reserve

A capital redemption reserve is an established fund that holds money to protect a company from the loss of capital. A company protects itself from such a loss by essentially setting aside the amount of capital required for the specific transaction. By maintaining the capital redemption reserve, the company can set aside adequate funding to pay creditors in the event that it runs into financial problems. It can use the capital redemption reserve for specific purposes with court approval

When to use CRR fund• According to “Principles of Finance,” by Scott Besley and Eugene

Brigham, the most common situation that requires a company to create a capital redemption reserve is a redemption of shares. Per SEC regulations, any time a company buys back its own shares with capital or with new shares, it must put the same amount of money into a capital redemption reserve. The fund, therefore, offsets the reduction of the company’s equity as a result of the share buyback. The company must set aside the same amount of capital in a capital redemption reserve fund when it purchases the shares with company profitsThis means the company can use the funds for no purpose beyond that of maintaining company equity or issuing bonus shares. Ultimately, the capital redemption reserve protects a company’s creditors.