How to Issue Bonus Shares Under Section 63 of the Companies Act, 2013

How to Issue Bonus Shares Under Section 63 of the Companies Act, 2013

If your company has been doing well and reserves have built up nicely, you have probably had this thought: "We want to reward our shareholders, but we don't want to drain our bank account with a cash dividend." Maybe investors have been asking when they will see some return, or you simply want your shareholding to reflect the wealth the company has quietly built up.

This is exactly the situation bonus shares are built for. Instead of paying cash, you convert part of your free reserves into share capital and hand shareholders more shares, absolutely free, in the same proportion they already hold. It sounds simple, and conceptually it is, but Section 63 of the Companies Act, 2013 lays down specific conditions, approvals, and filings that must be followed carefully. Get it wrong, and regulators may treat the bonus issue as invalid. Here's exactly how this works.

What is a Bonus Issue (Section 63 Overview)

A bonus share issue is when a company issues new, fully paid-up shares to its existing shareholders for free, in proportion to shares already held. If a shareholder owns 100 shares and the company announces a 1:1 bonus, they get 100 more shares — no payment required.

The company isn't creating value out of thin air. What happens is an accounting shift: money sitting in free reserves, the securities premium account, or the capital redemption reserve gets "capitalized" — moved from reserves into paid-up share capital. The shareholder's overall stake in net worth doesn't change on day one; they just hold more shares, each representing a smaller slice of the same pie.

Section 63 of the Companies Act, 2013 is the specific provision governing this. It covers:

• What sources of funds can be used for a bonus issue
• Conditions a company must satisfy before issuing bonus shares
• Approvals required (board and shareholders)
• What happens to partly paid-up shares
• The restriction against issuing bonus shares in place of a dividend

Before the 2013 Act, bonus issues were largely governed by SEBI guidelines (for listed companies) and general practice. Section 63 gave this a clear statutory footing applicable to all companies, subject to their Articles of Association permitting it.

Why Companies Issue Bonus Shares

Founders and CFOs consider bonus issues for a mix of reasons:

• Rewarding shareholders without touching cash reserves. You signal confidence and share prosperity without writing a cheque.
• Capitalizing free reserves. Many companies accumulate reserves that just sit on the balance sheet. A bonus issue converts this into share capital, making the capital structure look more robust.
• Improving stock liquidity (listed companies). As share count rises and price per share adjusts downward proportionately, the stock becomes more affordable and tradable.
• Signalling financial health. A bonus issue is often read as a sign the company is doing well and confident about the future.
• Aligning paid-up capital with actual net worth. A bonus issue narrows the gap between real net worth and paid-up capital, which helps when raising debt or attracting investors.
• No dilution of ownership percentage. Shares are issued proportionately, so nobody's relative ownership changes — a "neutral" action compared to a fresh issue to new investors.
• Preparing for future fundraising or listing. Startups planning an IPO sometimes use bonus issues to adjust share count and per-share value to a range more conventional to future investors.

Remember: a bonus issue brings no new money into the company. It is a rearrangement of existing reserves into capital, not a fundraising exercise.

Eligibility and Conditions for Issuing Bonus Shares

Section 63 sets out specific conditions, and missing even one can make the bonus issue non-compliant:

• Authorization in the Articles of Association (AOA). The AOA must permit a bonus issue; if silent or restrictive, amend it first via special resolution.
• Approval in a general meeting. The Board recommends it, but shareholders must approve it in a general meeting — board approval alone is not sufficient.
• No default on fixed deposits or debt securities. The company must not be in default on interest or principal for public fixed deposits or any debt securities (debentures, bonds, etc.).
• No default in statutory employee dues. No default on PF, gratuity, or bonus payments owed to employees.
• Partly paid-up shares must first become fully paid-up. Any partly paid equity shares must be converted to fully paid-up before bonus shares are allotted.
• Cannot be issued in lieu of dividend. A bonus issue cannot substitute for a dividend shareholders were otherwise entitled to — the two are distinct actions under law.
• Permitted sources of funds only. Bonus shares can only come from:

- Free reserves built out of genuine profits

- The securities premium account

- The capital redemption reserve account

Bonus shares cannot be issued out of reserves created by revaluation of assets — these are notional and don't represent realized profit.

If any condition fails on the proposed date, the company cannot proceed until it is resolved — clearing the default, or converting partly paid shares to fully paid.

Documents Required

Typical documentation includes:

• Certified board resolution approving the proposal
• Notice of general meeting with explanatory statement
• Certified shareholders' resolution (ordinary or special, as applicable)
• Latest audited financials showing free reserves, securities premium, and capital redemption reserve balances
• Auditor's (or practicing CS's) certificate confirming compliance with Section 63 conditions
• Altered MOA and AOA, if authorized capital needs increasing
• List of proposed allottees with bonus shares proportionate to existing holding
• Board resolution for allotment, post general meeting approval
• Updated register of members
• PAN and KYC details for regulatory filings

Requirements vary by company type, so have a professional review your exact checklist before starting.

Step-by-Step Process and Forms

Verify current requirements and timelines with a professional, since MCA procedures and forms are updated periodically.

1. Check eligibility. Confirm reserve balances, no defaults on deposits/debt/statutory dues, and that shares are (or will be) fully paid-up.
2. Amend the AOA, if needed, via special resolution.
3. Hold a Board Meeting to approve the proposal, decide the bonus ratio (say 1:1 or 2:1), and call the general meeting.
4. Increase authorized capital, if needed — via shareholder resolution and a filing, commonly Form SH-7 (verify current requirement), with the ROC.
5. Convene the General Meeting for shareholders to approve the bonus issue and related resolutions.
6. File resolutions with the ROC — commonly via Form MGT-14 for applicable resolutions (verify current requirement and timeline).
7. Hold a follow-up Board Meeting to approve actual allotment to eligible shareholders.
8. File the return of allotment — typically Form PAS-3, generally within a couple of weeks of allotment (verify current timeline).
9. Update the register of members with the new allotment.
10. Issue share certificates within the prescribed period.
11. Intimate the stock exchange, if listed, per SEBI disclosure norms.

Have a CS or CA validate your specific checklist and form numbers before each filing.

Cost and Fees for Bonus Share Issue in 2026

Costs generally fall into professional fees and government/MCA fees. Treat these as indicative ranges only, and verify current rates before budgeting.

• Professional fees for drafting, the auditor's certificate, filings, and coordination can range from a few thousand rupees for a simple private company case to considerably more where a capital increase, AOA amendment, or larger shareholder base is involved.
• Government/MCA filing fees for forms like SH-7 follow a slab structure tied to authorized share capital — higher capital means a higher slab. These are revised periodically, so verify the current rate.
• Stamp duty may apply in some states on a capital increase, and varies by state.
• Auditor's certification fee, if charged separately.

Staying within existing authorized capital keeps costs lower since you avoid the SH-7 filing. A capital increase means a meaningfully higher outlay. Always ask for an itemized quote separating professional fee from government fee.

Timeline

A bonus share issue typically takes a couple of weeks to a couple of months, depending on:

• Whether the AOA already permits it and authorized capital is sufficient (faster).
• Whether AOA amendment and capital increase are needed (slower — extra resolution and SH-7 processing).
• Statutory notice periods for the general meeting.
• Post-allotment filing windows that need careful tracking.

A straightforward case with no capital increase might complete within a few weeks. A more involved case with AOA amendment and capital increase could take a couple of months. Build in buffer time and verify current notice periods and filing windows before committing to a timeline.

Bonus Shares vs Rights Issue vs Stock Split — Key Distinctions

1. Bonus Shares (Section 63): Free shares from free reserves, securities premium, or capital redemption reserve, proportionate to existing holding. Shareholders pay nothing; reserves fall and paid-up capital rises by the same amount. No new money enters the company.
2. Rights Issue (Section 62): New shares offered proportionately at a price (par, premium, or discount). Shareholders pay, and the company receives fresh funds — a genuine capital-raising exercise.
3. Stock Split: Divides face value into smaller denominations (e.g., one Rs 10 share into two Rs 5 shares). Share count rises, but there's no capitalization of reserves and no new capital issue. Total investment value and ownership stay the same; only face value and count change.

Quick memory aid: rights issue brings in cash, bonus issue capitalizes reserves with no cash movement, and a stock split doesn't touch reserves or capital at all.

Common Mistakes Companies Make

• Using revaluation reserves as the source — a serious error, since only free reserves, securities premium, and capital redemption reserve qualify.
• Ignoring the default condition on fixed deposits, debt securities, or statutory dues like PF and gratuity.
• Forgetting to fully pay up partly paid shares first, a common oversight in companies with mixed shareholding history.
• Treating it as a substitute for dividend, which is explicitly not permitted under Section 63.
• Missing the return of allotment filing deadline, which can attract penalties.
• Not updating the register of members and cap table promptly, creating confusion during fundraising or due diligence.
• Overlooking the need to amend AOA or increase authorized capital, causing avoidable delays.
• Not obtaining the auditor's compliance certificate, which can create issues if questioned later.
• Incorrect proportional allotment, especially with fractional entitlements, leading to shareholder disputes.

Frequently Asked Questions

What is the source of funds for issuing bonus shares?

Bonus shares can only be issued out of free reserves, the securities premium account, or the capital redemption reserve account — never out of reserves created by revaluing assets, since those aren't realized profits.

Is shareholder approval mandatory for a bonus issue?

Yes. The Board recommends it, but shareholders must sanction it in a general meeting. Board approval alone is not sufficient under Section 63.

Can a company issue bonus shares instead of paying a dividend?

No. Section 63 specifically prohibits issuing bonus shares in lieu of a dividend shareholders are otherwise entitled to — these are separate corporate actions.

What is the tax treatment for shareholders receiving bonus shares?

Receiving bonus shares generally isn't taxable at allotment since shareholders pay nothing. Tax implications typically arise later on sale, around cost of acquisition and capital gains. Since rules can change, consult a tax advisor for your situation.

Can a startup with losses still issue bonus shares?

A company needs adequate free reserves, securities premium, or capital redemption reserve to fund a bonus issue. If these are insufficient — common for loss-making startups — bonus shares typically cannot be issued regardless of growth potential. Conditions on defaults and dividends still apply too.

Is there a minimum gap required between two bonus issues?

The Companies Act and Section 63 don't prescribe a rigid mandatory gap for private companies, though SEBI regulations may apply for certain listed scenarios. Reserve availability naturally limits frequency. Verify current requirements with a professional before planning consecutive issues.

Do partly paid-up shares need special treatment before a bonus issue?

Yes. Any partly paid-up shares must be made fully paid-up before bonus shares can be issued — this is mandatory under Section 63 and cannot be waived.

What forms need to be filed with the ROC for a bonus issue?

Typically a return of allotment (commonly Form PAS-3), a filing for certain shareholder resolutions (commonly Form MGT-14), and, if authorized capital is increased, a filing for that increase (commonly Form SH-7). Verify current form applicability and timelines before filing, since the MCA updates these periodically.

How Legal Suvidha Makes This Effortless

This is exactly the kind of process where one wrong document, a mismatched detail, or a missed deadline turns into a rejection, a resubmission, or a running penalty. Legal Suvidha handles the whole thing end-to-end so you can focus on your business.

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