A bonus issue is when a company converts part of its accumulated profits or reserves into share capital and gives the resulting shares free of cost to existing shareholders, in proportion to their current holding. Because no money changes hands, a bonus issue does not raise fresh funds — it simply capitalises reserves the company already owns. In India the process is governed by Section 63 of the Companies Act, 2013, read with Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014, and, for listed companies, the SEBI (ICDR) Regulations, 2018.
Why companies issue bonus shares
- Capitalise free reserves and signal financial strength to the market
- Improve liquidity by increasing the number of shares in circulation
- Lower the per-share price so the stock is more affordable to retail investors
- Reward shareholders without draining cash the way a dividend would
- Bring paid-up capital closer to the capital actually employed in the business
Conditions under Section 63
Bonus shares can be issued only out of the company's free reserves, securities premium account, or capital redemption reserve — never out of a revaluation reserve. Before issuing, the company must satisfy each of the following:
- The issue is authorised by the Articles of Association
- It is recommended by the Board and approved by members in general meeting (ordinary resolution)
- The company has not defaulted in payment of interest or principal on its fixed deposits or debt securities
- The company has not defaulted in payment of statutory dues of employees such as provident fund, gratuity and bonus
- All partly paid-up shares outstanding on the date of allotment are made fully paid-up
Two further rules matter: a bonus issue cannot be made in lieu of dividend (Section 63(3)), and once the Board recommends a bonus, that decision cannot be withdrawn.
How the process works
- Confirm that adequate free reserves or premium are available, and that the authorised capital is sufficient — increase it via Section 61 and Form SH-7 if not.
- Pass a Board resolution recommending the issue and fixing the ratio (for example 1:1 or 2:1).
- Obtain shareholder approval by ordinary resolution and fix a record date.
- Allot the shares to eligible shareholders as on the record date.
- File Form PAS-3 (return of allotment) with the ROC within 30 days of allotment, then issue or credit the share certificates.
Listed companies also follow the SEBI framework: since October 2024, bonus shares must be credited and admitted for trading on a T+2 basis, where T is the record date, so investors are not left holding non-tradable shares.
Bonus issue vs stock split
Both increase the share count and reduce the price, but they are legally distinct actions:
| Aspect | Bonus issue | Stock split |
|---|---|---|
| Governing provision | Section 63 | Section 61(1)(d) |
| Face value per share | Unchanged | Reduced (sub-divided) |
| Reserves | Capitalised (reduced) | Unaffected |
| Paid-up capital | Increases | Unchanged |
Tax treatment for shareholders
Receiving bonus shares is not taxable — no income arises on allotment. When you eventually sell them, the cost of acquisition is treated as nil, so the entire sale value becomes a capital gain. The holding period runs from the date the bonus shares were allotted, not from the original shares, which decides whether the gain is short-term (STCG at 20% on listed equity) or long-term (LTCG at 12.5% above the ₹1.25 lakh annual exemption). Also watch the anti-avoidance rule in Section 94(8) of the Income-tax Act, which disallows artificial "bonus stripping" losses claimed by buying just before, and selling just after, the record date.