Page 79 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes share premium amount (collected in cash only) can be used by the company in paying up
unissued shares of the company to be issued to its members as fully paid bonus shares. Also the
company can utilise the amount of the capital redemption reserve in paying up unissued shares
of the company to be issued to its members as fully paid bonus shares. The SEBI (Disclosure and
Investor Protection) Guidelines, 2000 which came into force w.e.f. 27th day of January, 2000
require that the company while issuing bonus shares shall ensure the following : (a) No company
shall, pending conversion of FCDs/PCDs/ issue any by way of bonus unless similar benefit is
extended to the holders of such FCDs/ through reservation of shares in proportion to such
convertible part of FCDs or PCDs (b) The shares so reserved may be issued at the time of
conversion(s) debentures on the same terms on which the bonus issues were made.

Definition

Bonus Share: A bonus share is a free share of stock given to current shareholders in a company,
based upon the number of shares that the shareholder already owns. While the issue of bonus
shares increases the total number of shares issued and owned, it does not increase the net worth
of the company. Although the total number of issued shares increases, the ratio of number of
shares held by each shareholder remains constant. An issue of bonus shares is referred to as a
bonus issue. Depending upon the constitutional documents of the company, only certain classes
of shares may be entitled to bonus issues, or may be entitled to bonus issues in preference to
other classes.
Bonus Issue: A bonus issue (or scrip issue) is a stock split in which a company issues new shares
without charge in order to bring its issued capital in line with its employed capital (the increased
capital available to the company after profits). This usually happens after a company has made
profits, thus increasing its employed capital. Therefore, a bonus issue can be seen as an alternative
to dividends. No new funds are raised with a bonus issue.
Issue of Bonus Shares: Bonus shares are issued by cashing in on the free reserves of the company.
The assets of a company also consist of cash reserves. A company builds up its reserves by
retaining part of its profit over the years (the part that is not paid out as dividend). After a while,
these free reserves increase, and the company wanting to issue bonus shares converts part of the
reserves into capital.
Conditions for Bonus issue: Bonus shares are issued by converting the reserves of the company
into share capital. It is nothing but capitalization of the reserves of the company. There are some
conditions which need to be satisfied before issuing Bonus shares:

(a) The bonus issue is not made unless the partly-paid shares, if any, are made fully paid-up.
(b) 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.

(c) The Company has sufficient reason to believe that it has not defaulted in respect of
payment of statutory dues of the employees such as contribution to provident fund,
gratuity, bonus etc.
(d) A company which announces its bonus issue after the approval of the Board of directors
must implement the proposal within a period of six months from the date of such approval
and shall not have the option of changing the decision.
(i) The articles of association of the company shall contain a provision for capitalisation
of reserves, etc.
(ii) If there is no such provision in the articles the company shall pass a resolution at its
general body meeting making provisions in the articles of association for
capitalisation.

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