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Issue of Bonus Shares
Bonus Shares are issued to existing shareholders by
the company free of cost on a pro-rata basis e.g. Bonus
Issue at 1:3 means one bonus share for every three shares
held (Example: APL Apollo at 1:1 on 18 Sept ’21; Kanpur
Plastipack at 1:2 on 16 Sept ’21; Mahindra Life at 2:1 on
15 Sept ‘21
This happens when a company decides to capitalize a
part of the substantial amount of reserves having been
built up, which, as a financial prudence, cannot be
distributed as dividends
As issue of Bonus Shares do not entail any cash flow
to the company, it is not a Source of Funds
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Effect on Balance Sheet of the Company after Bonus
Issue of Shares
Shareholders’ Funds do not change
Equity Share Capital amount changes (Increases)
Reserves changes by the same amount (decreases)
Assets composition and amounts do not change
The amount of reserves thus capitalized, otherwise
available for distribution as dividends, is no longer
available for distribution of dividends after the Bonus
Issue
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Rules for issuing Bonus Shares:
The company may issue fully paid-up bonus shares
out of (u/s 63):
Free Reserves (built out of profits)
Security Premium Account (to the extent collected in
cash)
Capital Redemption Reserve Account
Note: Reserves created out of Revaluation of Assets cannot be
used for issuing Bonus Shares
Bonus Shares cannot be issued in lieu of Dividend
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Free Reserves u/s 2(43) of the Companies Act 2013,
states that Free Reserves are such reserves which can be
used for distribution of dividends.
However the following are not free reserves:
Any unrealized gains, notional gains or revaluation of
assets, shown as reserves or otherwise
Any change in the carrying amount of an asset or
liability recognized in equity, including surplus in Profit
& Loss Account on measurement of assets / liabilities at
fair value
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Issue of Bonus Shares should be done only when:
Articles of Association permits it
It has been authorized in the General Meeting on the
recommendation of the Board of Directors
It has not defaulted in its debt servicing
It has not defaulted in making statutory dues of the
employees
Partly paid-up shares are made fully paid up
Neither the Companies Act nor the SEBI (Issue of
capital & Disclosure Requirements) Regulations 2009 has
specified any order of utilization of the sources for
issuing bonus shares (CRR is usually used first)
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Example: XYZ Ltd has the following Capital Structure:
100,000 Equity Shares @ INR 10/- each …. INR 1,000,000
Securities Premium …………………………. INR 100,000
Profit & Loss Account …………….…………. INR 500,000
The company makes a Bonus Issue on 1:4 basis
Amount required for issuing Bonus Shares =
100,000 X ¼ X INR 10/- = INR 250,000
To be taken from Securities Premium A/c INR 100,000
To be taken from Profit & Loss A/c INR 150,000
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The capital structure of the company after the bonus
issue will be:
125,000 Equity Shares @ INR 10/- each …. INR 1,250,000
Profit & Loss Account …………….…………. INR 350,000
Example: PQR Ltd has a subscribed capital of INR
1,000,000/- in equity shares of INR 10/- each. The
company decides to issue bonus shares in the ratio of 1:5
by utilizing the Securities Premium Account. Show the
necessary journal entries in the books of PQR Ltd.
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Solution:
No. of existing equity shares = INR 1,000,000 / INR 10/-
= 100,000
Amount required = 100,000 X 1/5 X INR 10/- = INR
200,000/-
Securities Premium A/c …………..… Dr 200,000
To Bonus to Shareholders A/c 200,000
(Being Bonus Issue declared out of Securities Premium A/c
as per Board Resolution No… Dt….. As confirmed by
General Meeting Resolution No…. Dt….)
_______________________________________________________________
Bonus to Shareholders A/c …………. Dr 200,000
To Equity Share Capital A/c 200,000
(Being issue of 20,000 equity shares at INR 10/- each as per
Board Resolution No…. Dt….)
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After a Bonus Issue of Shares, market price usually falls.
This is because number of outstanding shares (supply
side) increases without any increase in the total value
Company Pre-Bonus
no. of shares
Pre-Bonus
Market
Price /
Share (INR)
Total Value
(INR)
Bonus
Ratio
Post-Bonus No.
of Shares
Post-Bonus
Market
Price /
Share (INR)
A 1,000 30 30,000 1:1 2,000 15
B 1,000 60 60,000 1:2 1,500 40
C 1,000 120 120,000 2:1 3,000 40
Empirically it has been observed that the fall in price
does not happen in a proportionate manner as indicated
above theoretically
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Issue of Bonus Debentures
A company can issue debentures free of cost to existing
equity shareholders out of accumulated reserves
Bonus Shares Bonus Debentures
Out of Accumulated
Reserve
Accumulated
Reserve
Equity Unchanged Decrease
D/E Ratio Unchanged Increase
ROE Unchanged Increase
ROCE Unchanged Unchanged
EPS Decrease Unchanged
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Crib Sheet
Bonus Shares are issued to existing shareholders by the company free of cost on a
pro-rata basis e.g. Bonus Issue at 1:3 means one bonus share for every three shares held
(Example: APL Apollo at 1:1 on 18 Sept ’21; Kanpur Plastipack at 1:2 on 16 Sept ’21;
Mahindra Life at 2:1 on 15 Sept ‘21
This happens when a company decides to capitalize a part of the substantial amount
of reserves having been built up, which, as a financial prudence, cannot be distributed
as dividends
As issue of Bonus Shares do not entail any cash flow to the company, it is not a
Source of Funds
Effect on Balance Sheet of the Company after Bonus Issue of Shares
Shareholders’ Funds do not change
Equity Share Capital amount changes (Increases)
Reserves changes by the same amount (decreases)
Assets composition and amounts do not change
The amount of reserves thus capitalized, otherwise available for distribution as
dividends, is no longer available for distribution of dividends after the Bonus Issue
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Crib Sheet
Rules for issuing Bonus Shares:
The company may issue fully paid-up bonus shares out of (u/s 63):
Free Reserves (built out of profits)
Security Premium Account (to the extent collected in cash)
Capital Redemption Reserve Account
Note: Reserves created out of Revaluation of Assets cannot be used for issuing Bonus Shares
Bonus Shares cannot be issued in lieu of Dividend
Issue of Bonus Shares should be done only when:
Articles of Association permits it
It has been authorized in the General Meeting on the recommendation of the Board
of Directors
It has not defaulted in its debt servicing
It has not defaulted in making statutory dues of the employees
Partly paid-up shares are made fully paid up
Neither the Companies Act nor the SEBI (Issue of capital & Disclosure Requirements)
Regulations 2009 has specified any order of utilization of the sources for issuing bonus
shares (CRR is usually used first)
