Bonus Issue of Shares under Section 63: Conditions, Reserves

A bonus issue converts a company’s accumulated reserves into paid-up share capital and hands the additional shares to existing shareholders in proportion to their holding, without asking them to pay a rupee. Section 63 of the Companies Act, 2013 is the only provision that governs this for Indian companies, and it is narrower than most boards expect: it fixes exactly which reserves qualify, bars a company from using a bonus issue to dodge a dividend, and locks in a resolution and filing sequence that leaves very little room to improvise. Get the reserves test wrong and the statutory auditor will not certify the issue. Get the filing sequence wrong and the penalty clock under Section 39 and Section 117 starts running the same day. This article works through both, along with the additional layer that applies once a company is listed.

What is the deadline to file PAS-3 and MGT-14 for a bonus issue of shares?

Form MGT-14 for the special resolution authorising the bonus issue must be filed within 30 days of the resolution being passed (Section 117(1), Companies Act, 2013). Form PAS-3, the return of allotment, must be filed within 30 days of the actual allotment (Section 39(4)). Missing either attracts a penalty of ₹1,000 per day of default, capped at ₹1 lakh under Section 39(5), and a parallel penalty under Section 117(2) for the MGT-14 delay.

What is a bonus issue of shares under company law?

A bonus issue is a capitalisation of reserves, not a fresh source of capital. The company does not receive any consideration; it simply reclassifies an amount sitting in free reserves, the securities premium account or the capital redemption reserve as paid-up equity share capital, and issues new shares of the same class to existing members in the ratio approved by the board, commonly expressed as 1:1, 1:2 or 2:1. Total shareholder wealth in the company does not change on the day of the bonus issue. What changes is the number of shares outstanding, the paid-up capital on the balance sheet, and, for a listed company, market liquidity and the optics of a growing capital base.

Founders reach for a bonus issue mainly for two reasons: to bring the paid-up capital of a subsidiary or holding structure in line with net worth ahead of a fundraise or restructuring, and to reward existing shareholders without disturbing cash flow when the company would rather retain cash than pay a dividend. Neither reason changes the statutory test. Section 63 applies identically whether the bonus issue is a housekeeping step inside a group structure or a shareholder-facing event ahead of an IPO.

What are the Section 63 conditions for issuing bonus shares?

A company cannot decide to issue bonus shares and simply pass a resolution. Section 63(2) sets six cumulative conditions, and the company fails the section if even one is not met on the date the board recommends the issue.

• Authorisation in the articles. The articles of association must permit capitalisation of reserves and issue of bonus shares. If they do not, the articles must be altered under Section 14 before the board can recommend a bonus issue, which itself needs a special resolution and, for a private company, no further government approval.
• Recommendation by the board, authorisation by members. The board recommends the bonus issue; the members must then authorise it in a general meeting. Unlike a rights issue under Section 62, this is not solely a board matter even for a company whose articles already permit it, because Section 63(2)(a) requires member authorisation “on the recommendation of the Board.”
• No default on fixed deposits or debt securities. The company must not be in default on payment of interest or principal in respect of a fixed deposit or debt security issued by it. A single missed interest payment on an outstanding NCD, even if since cured, needs board-level comfort before the bonus resolution is placed.
• No default on statutory dues to employees. The company must not have defaulted on payment of statutory dues to employees, specifically provident fund, gratuity and bonus (the statutory bonus under the Payment of Bonus Act, unrelated to the bonus share issue itself). A pending EPFO show-cause notice is a real blocker here, not a formality.
• Partly paid-up shares must be fully paid up. Section 63(2)(e) bars a bonus issue while any existing shares remain partly paid. Companies that issued partly paid shares years earlier and never called up the balance need to close that out first.
• Compliance with prescribed conditions. Section 63(2)(f) is the residual clause pulling in Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014, which adds that a board recommendation once announced cannot subsequently be withdrawn, and that where the articles require member approval for capitalisation, the bonus issue must be implemented within two months of the board meeting that recommended it.

Section 63(3) adds a standalone rule that sits outside the six conditions: bonus shares cannot be issued in lieu of a dividend. A board cannot resolve to skip a declared or expected dividend and issue bonus shares instead; the two are treated as separate corporate actions under the Act (Section 63(3), Companies Act, 2013).

Is board approval enough, or does a bonus issue always need a shareholder resolution?

Board approval alone is not enough. Section 63(2)(a) requires the bonus issue to be authorised in the general meeting on the board’s recommendation, so an ordinary or special resolution of the members, depending on what the articles prescribe, is mandatory in every case, including for wholly owned subsidiaries issuing bonus shares to a single parent shareholder.

The reserves test: which reserves can actually fund a bonus issue?

This is where most rejected bonus issues fail, because the balance sheet can show a healthy reserves figure that is nonetheless the wrong kind of reserve. Section 63(1) permits a bonus issue to be funded from only three sources, and the proviso to Section 63(1) closes off a fourth that companies commonly try to use.

Table: sources permitted and barred for a bonus issue under Section 63

The practical test an auditor applies before signing the certificate is narrower than “does the reserve exist.” It is: was this reserve created out of real, realised profit, and is it free of any restriction, contractual or statutory, on distribution. A reserve created by writing up the value of land the company owns, however conservative the valuation, fails this test even if the company genuinely believes the asset is worth more. A securities premium account funded by a share swap or a non-cash consideration passes the test for an unlisted company but fails it for a listed company, because SEBI’s Chapter XI framework tightens the same test at the point of listing.

Once a company lists, Regulation 293 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 layers an additional filter on top of Section 63: the bonus issue must be made only out of free reserves, the securities premium account or the capital redemption reserve account, and these must be “built out of the genuine profits or securities premium collected in cash,” with revaluation reserves barred exactly as under Section 63(1). For a listed company this means the securities premium test is stricter than for a private company, since only the cash-realised portion of the account counts, and any premium recognised on a non-cash transaction, a slump sale consideration settled in shares, or a merger accounted for under the pooling method, has to be carved out before the reserves test is run.

Two further conditions from the SEBI framework matter once a company has convertible instruments outstanding. First, any Fully Convertible Debenture (FCD) or Partly Convertible Debenture (PCD) holder is entitled to a proportionate reservation of bonus shares against the convertible portion of their instrument, issuable on conversion at the same terms as the bonus issue to equity holders. Second, if the articles require shareholder approval for capitalisation of reserves, the bonus issue must be implemented within two months of the board meeting recommending it, the same two-month window Rule 14 sets for all companies, listed or not.

How does the board and shareholder approval process run for a bonus issue?

The sequence below is the one that works cleanly in practice and keeps every filing inside its statutory window.

1. Confirm articles and authorised capital. Check that the articles authorise capitalisation of reserves, and that authorised share capital is sufficient to absorb the new shares. If either falls short, the amendment or increase has to be pushed through first, since Section 63(2)(a) and basic capital maintenance rules both depend on it.
2. Board meeting: recommend the bonus issue. The board considers the reserves position, confirms none of the six Section 63(2) conditions is breached, fixes the bonus ratio and record date, and recommends the issue to members. Once announced, this recommendation cannot be withdrawn (Rule 14, Companies (Share Capital and Debentures) Rules, 2014).
3. General meeting: members authorise the issue. Members pass the resolution the articles require, ordinary or special. For a listed company this is also the point at which the SEBI ICDR conditions on FCD/PCD reservation are built into the resolution.
4. File Form MGT-14. Within 30 days of the resolution (board or member, whichever triggers the filing under Section 117), file MGT-14 with the ROC. For a bonus issue this SRN also becomes a mandatory field when the return of allotment is filed.
5. Allot the shares and update records. Allotment must be within two months of the board meeting where the articles require member approval for capitalisation. Update the register of members and, for dematerialised shares, coordinate with the depositories for credit.
6. File Form PAS-3. Within 30 days of allotment (Section 39(4)), file the return of allotment with the certified list of allottees and the board and shareholder resolutions attached. No registered valuer’s report is needed since bonus shares are not issued for consideration other than cash.
7. Issue share certificates. Within two months of allotment for a physical-share company; for demat shares, credit happens through the depository corporate action instead of a physical certificate.

Table: filing obligations that fall out of a bonus issue

A bonus issue is not treated as a foreign investment for FDI approval purposes since no fresh consideration flows in, but where existing foreign shareholders receive their proportionate bonus shares, the allotment still has to be reported to the RBI through Form FC-GPR within the same 30-day window that applies to any equity allotment involving a person resident outside India.

What additional conditions apply to a bonus issue by a listed company?

Chapter XI of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, Regulations 293 to 295, sits on top of Section 63 for listed companies and adds process, not a different reserves test in substance, only a stricter cash-realisation filter on the securities premium account as described above.

• FCD/PCD reservation. Convertible debenture holders must be reserved proportionate bonus shares, issuable at conversion on the same terms as the bonus issue.
• Record date and depository timeline. Documents for credit of bonus shares must reach the depositories by 12 noon on the next working day after the record date, which is treated as the deemed date of allotment. Trading in the bonus shares begins on the second working day after the record date (T+2).
• Statutory certification. A certificate from the statutory auditor, or a practising chartered accountant or company secretary, confirming compliance with the SEBI ICDR bonus issue conditions has to be obtained before the stock exchange grants final listing and trading approval.
• Demat-only allotment. Bonus shares to a listed company’s shareholders can only be allotted in dematerialised form.
• Website disclosure. The bonus issue and its terms have to be disclosed on the company’s website under Regulation 46 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

For an unlisted company preparing for an eventual listing, the practical takeaway is to run every bonus issue as if the ICDR cash-realisation test already applied to the securities premium account. It avoids a position, three or four years later, where a pre-IPO reserves history has to be reconstructed to prove that premium credited on a share swap or slump sale was genuinely cash, because by then the paper trail is thin and the merchant banker will ask for it during due diligence.

How are bonus shares taxed in the hands of shareholders?

The company itself has no tax event on a bonus issue since it is only a book entry moving reserves to paid-up capital, but the shareholder side has two rules worth knowing before the record date is fixed.

Cost of acquisition is nil. Under Section 55(2)(aa)(iiia) of the Income Tax Act, 1961, the cost of acquisition of a bonus share allotted without payment, on the basis of an existing holding, is taken to be nil for the purpose of computing capital gains under Sections 48 and 49. A shareholder who later sells the bonus shares pays capital gains tax on the full sale consideration, with no cost to deduct against it, though the benefit of long-term treatment and, for pre-2001 allotments, an option to substitute fair market value as on 1 April 2001, can still apply.

Holding period runs from the date of allotment, not from the date the original shares were acquired. Bonus shares are treated as a fresh asset for holding-period purposes. A shareholder who has held the original shares for years but received the bonus shares two months ago is short-term on the bonus shares alone, taxed under Section 111A for listed equity or at slab rates for unlisted shares, until the twelve or twenty-four month threshold (listed and unlisted respectively) is crossed from the allotment date.

Bonus stripping is restricted under Section 94(8). This anti-avoidance provision denies a shareholder the tax benefit of buying shares shortly before a bonus record date, receiving the bonus shares, and then selling the original shares at a loss created purely by the price drop that follows a bonus issue. Where an investor acquires shares within three months before the record date and sells the original shares within nine months after it, any loss on that sale is ignored for tax purposes and is instead added to the cost of acquisition of the retained bonus shares. The Finance Act, 2022 widened Section 94(8) to cover all securities, not only mutual fund units, with effect from 1 April 2023, so the restriction now applies squarely to listed equity bonus issues.

What is the cost of acquisition of bonus shares for capital gains purposes?

The cost of acquisition of bonus shares is nil under Section 55(2)(aa)(iiia) of the Income Tax Act, 1961, so the entire sale consideration on a later transfer is treated as capital gain. The holding period for classifying that gain as long-term or short-term runs from the date the bonus shares were allotted, not from the date the shareholder acquired the original shares.

What are the stamp duty and accounting treatment for a bonus issue?

Accounting entry. A bonus issue is recorded by debiting free reserves, the securities premium account or the capital redemption reserve account, and crediting share capital for the face value of the new shares issued. There is no cash movement and no impact on the profit and loss account; the transaction only reclassifies amounts within the equity section of the balance sheet, so total shareholders’ equity is unchanged even as paid-up capital rises.

Stamp duty. Stamp duty on the issue of share certificates applies at a uniform rate of 0.005% of the market value of the shares issued, under the amended Indian Stamp Act, 1899 framework effective 1 July 2020, collected through the depository for demat shares or paid directly for physical certificates. Because the amended Section 21 read with Section 2(16B) bases the duty on market value rather than on consideration actually paid, practitioner views differ on whether a bonus issue, which involves no consideration, is captured at all or falls within the same market-value base as any other allotment; companies should confirm the position with their stamp duty advisor state by state before treating a bonus issue as exempt.

Common mistakes that cost founders time and money

Treating a revaluation reserve as usable. Boards sometimes see a large reserve created after a fixed asset revaluation and assume it strengthens the case for a bonus issue. Section 63(1)’s proviso bars this outright, and an auditor who certifies a bonus issue funded even partly from a revaluation reserve is exposing themselves to professional liability. The fix is to run the reserves schedule past the auditor before the board meeting, not after.

Filing PAS-3 without the MGT-14 SRN. The PAS-3 e-form makes the MGT-14 SRN a mandatory field for a bonus issue regardless of the 30-day window, since the resolution filing is expected to have already happened. Companies that sequence this backward, filing PAS-3 before MGT-14 clears, end up with a rejected or incomplete return that has to be refiled, burning days off an already tight 30-day clock.

Missing the two-month implementation window. Rule 14 requires implementation within two months of the board meeting where the articles need member approval for capitalisation. Companies that treat the general meeting as the only real deadline and let allotment slip past two months from the board meeting are technically outside the rule, even if the shareholder resolution itself was passed well within time.

Assuming a bonus issue needs no FEMA reporting. Because no money changes hands, companies frequently skip Form FC-GPR for the portion of the bonus issue going to non-resident shareholders. The allotment is still a fresh issue of equity instruments to a person resident outside India and needs reporting within 30 days under the FEMA (Non-Debt Instruments) Rules, 2019, even at nil consideration.

Not checking statutory dues defaults at the group level. A default on provident fund or gratuity dues by a subsidiary or a group entity does not, by itself, block the parent’s own bonus issue. But where the same board, cash pool or PF trust is shared across group entities, an unresolved default anywhere in that chain is worth flagging to the board before the recommendation is minuted, since it is the kind of fact a due diligence exercise later surfaces and questions retroactively.

Frequently asked questions

Q: Can a private company issue bonus shares without shareholder approval?

A: No. Section 63(2)(a) requires the bonus issue to be authorised in a general meeting on the board’s recommendation, so member approval is mandatory for every company regardless of size or shareholding pattern.

Q: Can bonus shares be issued out of the general reserve?

A: Yes, provided the general reserve is a free reserve built out of genuine, realised profits and is not subject to a statutory or contractual restriction on distribution; a general reserve inflated by a revaluation credit is not eligible.

Q: What is the difference between a rights issue and a bonus issue under the Companies Act?

A: A rights issue under Section 62 raises fresh capital from existing shareholders who pay for the new shares; a bonus issue under Section 63 capitalises existing reserves and requires no payment from shareholders.

Q: Can a company issue bonus shares if it has defaulted on a loan from a bank?

A: Section 63(2)(c) only bars default on fixed deposits or debt securities and Section 63(2)(d) bars default on specific statutory employee dues; a plain bank loan default is not listed as a Section 63 condition, though loan covenants often independently restrict capital actions and should be checked separately.

Q: Does a bonus issue require RBI reporting for foreign shareholders?

A: Yes. Bonus shares allotted to a person resident outside India in proportion to their existing holding still require Form FC-GPR filing within 30 days of allotment under the FEMA (Non-Debt Instruments) Rules, 2019, even though no consideration is paid.

Q: How long does a bonus issue take from board recommendation to allotment?

A: A straightforward bonus issue with no reserves complications typically runs 30 to 45 days from board recommendation to allotment, driven mainly by the notice period for the general meeting and the two-month cap under Rule 14; complications in tracing the securities premium history can extend this further.

Q: Can bonus shares be issued to only some shareholders and not others?

A: No. A bonus issue must be made proportionately to all shareholders of the relevant class as on the record date; selectively excluding shareholders would convert it into a preferential allotment, attracting the Section 62(1)(c) and pricing framework instead.

Q: What happens if partly paid-up shares exist in the company?

A: Section 63(2)(e) bars a bonus issue until all partly paid-up shares are made fully paid, so the company must first call up and collect the unpaid balance before proceeding.

Q: Is a valuation report required for a bonus issue?

A: No. Since bonus shares are allotted for no consideration other than the capitalisation of reserves, PAS-3 does not require a registered valuer’s report, unlike a preferential allotment or a private placement priced above face value.

Q: What penalty applies for late filing of PAS-3 for a bonus issue?

A: A penalty of ₹1,000 for each day of default, capped at ₹1 lakh, applies to the company and every officer in default under Section 39(5) of the Companies Act, 2013.

Q: Can a company use securities premium received in a foreign currency for a bonus issue?

A: For an unlisted company, yes, provided it is a genuine premium credited to the account; for a listed company, only the portion realised in cash qualifies under Regulation 293 of the SEBI ICDR Regulations, 2018, so premium settled through a non-cash instrument would need to be excluded from the reserves test.

Q: Does a wholly owned subsidiary need a general meeting to issue bonus shares to its sole parent shareholder?

A: Yes. Section 63(2)(a) does not carve out an exception for a single-shareholder company, so the parent, acting as the sole member, still has to pass the resolution authorising the bonus issue at a general meeting or through a valid resolution in lieu of a meeting where permitted.

Q: Can an NBFC or a company with RBI registration issue bonus shares without RBI approval?

A: A bonus issue itself is not a regulatory approval event under RBI’s NBFC framework since no fresh capital or change in shareholding pattern occurs, though the company should confirm no RBI-imposed restriction on capital actions applies to it specifically, particularly where it operates under a supervisory action.

Q: What is the deadline to issue share certificates after a bonus allotment?

A: Two months from the date of allotment for shares held in physical form; for dematerialised holdings, credit through the depository takes the place of a physical certificate and typically completes within a few working days of the corporate action being processed.

Q: Does a shareholder pay tax at the time bonus shares are received?

A: No. Capitalisation of reserves through a bonus issue is not treated as income or a gratuitous receipt in the shareholder’s hands, since it is a reallocation of the company’s existing reserves rather than a fresh transfer of value; tax arises only on a later sale of the bonus shares, computed with a nil cost of acquisition.

Q: Can bonus stripping still be used to book a tax loss on shares?

A: Not effectively since 1 April 2023. Section 94(8) of the Income Tax Act, 1961, as widened by the Finance Act, 2022, disallows a loss on original shares sold within nine months of a bonus record date if those shares were bought within three months before it, and instead carries the disallowed loss forward as the cost of the retained bonus shares.

Bonus issue and other capital restructuring steps are easier to sequence correctly when the reserves history is already documented cleanly. If your team is preparing for a related capital action, our guide on allotment of shares in India and PAS-3 compliance walks through the filing calendar for rights issues, ESOP exercises and preferential allotments alongside bonus shares.

Regulatory references:

• Section 63, Companies Act, 2013 (conditions for issue of bonus shares)
• Section 63(3), Companies Act, 2013 (bar on bonus issue in lieu of dividend)
• Section 14, Companies Act, 2013 (alteration of articles)
• Section 39(4) and 39(5), Companies Act, 2013 (return of allotment and penalty)
• Section 117(1) and 117(2), Companies Act, 2013 (filing of resolutions)
• Section 88, Companies Act, 2013 (register of members)
• Rule 14, Companies (Share Capital and Debentures) Rules, 2014

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