Bonus shares can be issued only when the following conditions are satisfied: (i) The articles of association permits the issue of bonus shares; (ii) Company has sufficient undistributed profits; (iii) The Board passes a resolution for issuing bonus shares; (iv) The proposal of the board regarding issue of bonus shares has been approved by the members in the general meeting; (v) SEBI (ICDR) Regulations, 2009 (applicable to listed companies only) are complied with.

The company has to file within 30 days of the allotment of the bonus shares a return stating the number and nominal amount of bonus shares issued together with the names and addresses of the allottees and a copy of the resolution authorising issue of such shares (Sec. 75).

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SEBI (ICDR) Regulations, 2009:

Condition for Bonus Issue Subject to the provisions of the Companies Act, 1956, a listed company may issue bonus shares to its members if: It is authorized by its articles of association for issue of bonus shares, and capitalization of reserves; It has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it; It has sufficient reason to believe that it has not defaulted in respect of the 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 made fully paid up.

Restriction on Bonus Issue:

(1) A company cannot 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 favor of the holders of such outstanding convertible debt instruments in proportion to the convertible part thereof. (2) 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 only against Reserves:

(1) The bonus issue shall be made out of free reserves built out of the genuine profits or securities premium collected in cash only.

(2) Reserves created by revaluation of fixed assets shall not be capitalized for the purpose of issuing bonus shares. (3) The bonus share shall not be issued in lieu of dividend.

Completion of Bonus Issue:

(1) A company announcing a bonus issue after the approval of its board of directors and not requiring shareholders’ approval for capitalization of profits or reserves for making the bonus issue, shall implement the bonus issue within 15 days from the date of approval of the issue by its Board of Directors. (2) Where the company is required to seek shareholders’ approval for capitalization of profits or reserves for making the bonus issue, the bonus issue shall be implemented within two months from the date of the meeting of its Board of Directors wherein the decision to announce the bonus issue was taken subject to shareholders’ approval. Once the decision to make a bonus issue is announced, the issue cannot be withdrawn.