BONUS SHARES AND BONUS ISSUE The Articles of Association of a Company should permit the CAPITALISATION OF RESERVES which

is also known as issue of Bonus shares. S.205(3) of the Companies Act, 1956 is relevant when we discuss about Bonus issue and it provides as follows:-S.205(3) states that NO DIVIDEND SHALL BE PAYABLE EXCEPT IN CASH. It is pertinent to note that CASH includes Cheques in the form of warrants. The proviso to S.205(3) states that a Company may, capitalize profits or reserves by issuing fully paid up Bonus shares. The sums thus capitalized are transferred either from the Profit and Loss Account or Reserve Account to Share Capital. Such Bonus shares are issued to the existing members of the Company free of charge. The Share Premium Account under S.78(2), can be used ,inter alia, for issue of Bonus shares. and under S.80(5), Capital Redemption Reserve Account is also allowed to be utilized for the issue of Bonus shares. The SEBI(Issue of Capital and Disclosure Requirements)Regulations, 2009 on Bonus Issue are summarized as follows:These guidelines are SUBJECT to the Companies Act, 1956 or any other applicable law for the time being in force. - If the Articles of Association (A/A)of a Company is silent on the issue of Bonus shares, a Special Resolution is to be passed to AMEND the A/A of the Company enabling the issue of Bonus shares. -There should not be any default in the payment of interest or principal in respect of Fixed Deposits or the Debt Securities issued issued by the Company. - The Company has sufficient reason to believe that it has defaulted in respect of payment of STATUTORY DUES of the Employees such as Contribution to Provident Fund, Gratuity and Bonus. - The PARTLY PAID SHARES, if any, outstanding on the date of allotment, are to be made FULLY PAID UP. - Restrictions on Bonus Issue:a) No Issuer shall make a Bonus issue of Equity shares, if it has outstanding, fully or partly convertible debt Instruments at the time of making the Bonus Issue UNLESS it has made RESERVATION of Equity shares of the same class in favour of the holders of such Outstanding Convertible debt instruments IN PROPORTION to the Convertible part thereof. b) The Equity shares reserved for the holders of fully or partly convertible debt instruments SHALL be issued at the time of conversion of such Convertible debt Instruments ON THE SAME TERMS OR SAME PROPORTION ON WHICH THE BONUS SHARES WERE ISSUED. - Bonus Shares to be Issued only against Reserves etc., IF CAPITALISED IN CASH:The Bonus Issue shall be made out of (1) Free Reserves built out of the Genuine Profits or (2) Securities Premium collected in CASH only. The Reserves created by REVALUATION OF FIXED ASSETS shall not be capitalized or used for issuing Bonus shares. As stated earlier, Bonus shares shall not be issued in LIEU of Dividend. -Article 96 of the Table A, deals with Capitalization of Profits or Issue of Bonus shares. It says that, the Company in general meeting, upon recommendations of the Board, may resolve to capitalize its credit balance in the Companys Reserve accounts or Profit & Loss Account or otherwise available for distribution as dividend. The said Article also stipulates that the Board shall give effect to the resolution passed by the shareholders to issue Bonus shares. Since Article 96 Table A provides that the Bonus shares have to issued by the Shareholders by passing a resolution, if Board of Directors have to be empowered to Issue Bonus shares without shareholders approval, the Articles of Association, clause 96 has to be suitably amended to enable the Board of directors to issue Bonus shares. The SEBI Guidelines stipulates the time period within which the Issue of Bonus shares has to be completed and is as follows:-

a) An Issuer, announcing a Bonus Issue, to be made with the approval of the Board and without the requirement of shareholders approval, the Bonus issue has to be implemented within 15 days from the date of approval of the issue by its BOD. b) If the Issuer is required to seek shareholders approval for capitalization of profits or reserves for making the Bonus Issue, the Bonus Issue shall be implemented within 2 months from the date of the meeting of its BOD wherein the decision to announce the Bonus issue was taken subject to the approval of the shareholders was taken.