Bonus Issue of Shares — Section 63 Rules, Process & Tax India

Is a bonus issue the right move for your situation?

A bonus issue fits if any of these describe you:

• Your company has healthy accumulated profits or a large securities premium account, and you want shareholders to feel rewarded without a cash dividend.
• The share price (for a listed company) has risen to a level where the per-share price looks expensive to retail investors, and you want to bring it into a more tradable range.
• You want to increase the number of shares outstanding to improve liquidity and broaden the shareholder base.
• You are preparing for an ESOP pool or a future fundraise and want the capital structure to look cleaner with a larger paid-up base.
• Your reserves are large relative to paid-up capital and you want the balance sheet to reflect a more permanent capital base.

You are looking at the wrong instrument if:

• What you really want is to put cash in shareholders' hands — that is a dividend, and a bonus issue is not a substitute for one. Section 63(3) says so in plain words: bonus shares shall not be issued in lieu of dividend.
• Your "reserves" are mostly revaluation surplus from restating property or investments upward — those cannot be capitalised, and a bonus built on them is void.
• You want to reward only some shareholders or bring in new investors — a bonus issue goes to all existing members in proportion to their holdings. Selective allotment is a preferential issue under Section 62(1)(c), a different filing entirely.
• You want to reduce the face value per share — that is a stock split (alteration of share capital under Section 61), not a bonus issue.
• The company has defaulted on fixed-deposit repayments, debenture interest, or employee statutory dues like PF and gratuity — Section 63(2) bars the issue until the defaults are cured.

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What a bonus issue actually does

Strip away the procedure and a bonus issue is one accounting entry with real consequences. Suppose your company has ₹1 crore of paid-up capital (10 lakh shares of ₹10 each) and ₹4 crore sitting in free reserves. The board approves a 1:1 bonus. Each shareholder gets one new share for every share held. The company allots 10 lakh new shares of ₹10 each — ₹1 crore moves out of reserves and into share capital.

After the issue: paid-up capital is ₹2 crore, reserves are ₹3 crore, and a shareholder who held 1,000 shares now holds 2,000. The company's net worth is unchanged. Each shareholder's proportionate ownership is unchanged. What changed is the form of the capital — profits that could theoretically have been distributed are now locked in as permanent share capital — and the number of shares in circulation, which doubles.

That last point is why listed companies love bonus issues: doubling the share count roughly halves the per-share price, making the stock look more affordable and improving trading liquidity, without any shareholder being diluted. A shareholder who owned 1% owns 1% the day after, because everyone received the same ratio.

One thing a bonus issue never does: it never brings cash into the company. It is the opposite of a fundraise. If the business needs money, this is not the instrument.

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The three permitted sources — and the one that is banned

This is the section companies get wrong most often, so it deserves to be read slowly. Section 63(1) names exactly three sources from which fully paid-up bonus shares may be issued, and then adds one explicit prohibition. There is no fourth source and no room for creative interpretation.

Source 1: Free reserves

Free reserves are the accumulated profits available for distribution as dividend — the credit balance in the profit and loss account, the general reserve, dividend equalisation reserve and similar revenue reserves built out of genuine profits. In practice, for most private companies, this means the retained earnings sitting in the balance sheet after years of profitable operation. Before a bonus issue, the board needs a clear, audited figure: the latest audited financial statements are the starting point, and where the issue happens well after the year-end, an interim or management-certified position is checked so the capitalised amount does not exceed what actually exists.

Source 2: The securities premium account

When shares were issued at a premium in an earlier round — say ₹10 face value shares issued at ₹90, creating ₹80 per share of securities premium — that premium sits in a special account. Section 52 restricts what the securities premium account can be used for, and issuing fully paid-up bonus shares is one of the expressly permitted uses. For startups that raised priced rounds, the securities premium account is often the largest available source — sometimes far larger than accumulated profits, since early-stage companies may have little retained profit. This is entirely legitimate: premium collected from investors years ago can be capitalised as bonus shares today.

Source 3: The capital redemption reserve account

When a company redeems preference shares or buys back shares out of profits, it must transfer a sum equal to the nominal value of the shares redeemed or bought back into the capital redemption reserve. That reserve exists to keep the capital base intact, and Section 63 permits it to be capitalised through a bonus issue. Fewer private companies hold a CRR, but where preference-share redemptions happened in the past, it is a live source.

The banned source: reserves created by revaluation of assets

The proviso to Section 63(1) is absolute: no bonus issue by capitalising reserves created by the revaluation of assets. A revaluation reserve is a paper gain — the company restated its land, building or investments upward and booked the difference as a reserve. No profit was earned, no cash was received, and the Act does not let paper gains be converted into share capital. This is the rule that kills most DIY bonus plans: a company looks at "reserves and surplus" of ₹5 crore, plans a bonus, and only on scrutiny discovers ₹4 crore of it is revaluation surplus. The available base is ₹1 crore, not ₹5 crore.

The practical test: before the board meeting, reconcile the reserves. Take the latest audited balance sheet, strip out every rupee of revaluation reserve, and confirm the remaining free reserves plus securities premium plus CRR cover the proposed capitalisation with room to spare. Do this before the board announces anything — because once announced, the issue cannot be withdrawn.

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The six statutory conditions — Section 63(2) explained

Even with a valid source, Section 63(2) imposes six conditions. Miss one and the issue is non-compliant.

1. The Articles must authorise it. Capitalisation of profits has to be within the company's constitutional powers. Many Articles contain a standard capitalisation clause; some older ones do not. If the Articles are silent, amend them under Section 14 by special resolution before proceeding — the amendment is a short filing, but it must come first, not after.

2. Board recommendation plus general-meeting authorisation. The sequence is fixed: the board recommends, the shareholders authorise. The shareholder resolution is ordinarily an ordinary resolution; if the Articles demand a special resolution for bonus issues, follow the Articles. Skipping the general meeting — "the board decided, that's enough" — is the most common procedural defect in private companies.

3. No default on fixed deposits or debt securities. The company must not have defaulted in payment of interest or principal on fixed deposits or debt securities it issued. This is a solvency signal: a company that cannot service its borrowings should not be dressing up its capital structure.

4. No default on employee statutory dues. Same logic for people: no default in payment of provident fund contributions, gratuity, bonus or similar statutory dues of employees. Clear the defaults first, then bonus.

5. Partly-paid shares must be made fully paid. If any partly-paid shares are outstanding on the date of allotment, they must be made fully paid-up before the bonus shares are allotted. A bonus issue cannot sit on top of an incomplete capital structure — call up the unpaid amounts first.

6. Compliance with prescribed conditions. This is the hook for Rule 14 and any further conditions the rules impose — principally the no-withdrawal rule covered next.

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Rule 14: the announcement you cannot take back

Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014 is one sentence long and it changes how boards behave: once the board has announced its recommendation of a bonus issue, the company cannot subsequently withdraw it.

Read that again, because it is the single most underestimated rule in this area. The board meeting where the bonus is "just proposed" or "announced subject to formalities" is the point of no return. If the reserve reconciliation was wrong, if the Articles turn out not to authorise it, if a shareholder dispute erupts the next week — none of that un-announces the recommendation. The company must complete the issue.

This is why experienced company secretaries insist on finishing every verification — Articles check, reserve reconciliation, authorised-capital headroom, partly-paid cleanup — before the board meets, not after. The board paper for a bonus issue should attach the reserve computation and the Articles extract, so the directors are recommending something the company can actually execute.

Section 63(3) adds the companion rule: bonus shares shall not be issued in lieu of dividend. A company cannot declare "instead of the dividend we promised, here are bonus shares." The two are different instruments with different legal characters, and the Act keeps them separate.

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Advantages of a bonus issue

Rewards shareholders without a cash outflow

The headline advantage. Shareholders receive additional shares — tangible evidence that the company's profits are being shared — while every rupee of cash stays in the business. For companies in a growth phase, where cash is better deployed in expansion than distributed, this is the cleanest way to keep shareholders happy.

Signals management confidence

A bonus issue is read by the market as a statement: the board believes profits are sustainable enough to lock part of them permanently into share capital. Companies do not usually bonus out of reserves they expect to need for losses next year. For listed companies, the announcement itself typically draws positive attention.

Improves liquidity and affordability

More shares outstanding at a lower per-share price means smaller investors can participate and daily trading volumes tend to rise. A ₹2,000 share that becomes two ₹1,000 shares after a 1:1 bonus is psychologically and practically more accessible — the shareholder's wealth is identical, but the market for the shares widens.

No tax on receipt for shareholders

Bonus shares are capital, not income. Shareholders pay no tax when the shares are allotted — the tax event, if any, comes only when they sell. (The sale treatment is covered in the tax section below.)

Strengthens the permanent capital base

Capitalised reserves cannot be distributed as dividend later. For creditors and lenders reading the balance sheet, a larger paid-up capital base signals a more permanent commitment of funds to the business. It is a quiet balance-sheet upgrade.

Cleans up the capital structure before big moves

Companies often do a bonus issue ahead of an IPO, a rights issue, or an ESOP pool creation. A larger share count gives finer granularity for pricing, makes round lots work better, and presents a capital structure that looks established rather than thin.

Keeps every shareholder's proportion intact

Unlike a preferential allotment or a rights issue where some shareholders may not subscribe, a bonus issue is perfectly proportionate by law. Nobody is diluted, nobody gains at another's expense, and there is no shareholder dispute about fairness of pricing — because there is no price.

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Bonus issue vs dividend vs stock split — which one do you actually want?

Prospects often search these three together, so here is the decision in one place.

Choose a bonus issue when the company has strong reserves but wants to conserve cash, and the goal is to reward shareholders, improve liquidity, or tidy the capital structure. The reserves-to-capital conversion is permanent.

Choose a dividend when the company genuinely has surplus cash it does not need, and shareholders would prefer money to paper. Dividends are taxable in shareholders' hands under current law; bonus shares are not taxed on receipt. But dividends reduce cash — never bonus "instead of" a promised dividend.

Choose a stock split when the only goal is to reduce the per-share price. A split changes the face value (say ₹10 shares become ten ₹1 shares) without touching reserves at all. It is an alteration of share capital under Section 61, a simpler filing, and it achieves the affordability objective without the reserve and condition machinery of Section 63.

The comparison table in the GEO layer above sets out the mechanics side by side. If you are unsure which fits, the answer usually turns on one question: do you want reserves to become permanent capital (bonus), cash to leave the company (dividend), or just smaller-denomination shares (split)?

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If your company is listed — the SEBI overlay

Unlisted private companies follow Section 63 and stop there. Listed companies carry an additional layer under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, and it is strict on timing.

Implementation deadline. Regulation 295(1) requires the bonus issue to be implemented within 15 days of board approval — and "implementation" means the trading of bonus shares commences. Where shareholder approval is needed, the window is 2 months from the board meeting that announced the issue. These are hard outer limits, not targets.

The T+2 credit and trading timeline. Under SEBI's October 2024 framework, once the record date (T) is fixed: the deemed allotment date is T+1, bonus shares must be credited to demat accounts by 12 noon on T+1, and the shares must be available for trading on T+2. In-principle approval from the stock exchanges must be sought within 5 working days of the board meeting. Delays attract penalties under the ICDR framework.

The 12-month rule. No bonus issue within 12 months of any public issue or rights issue. A company that just raised money from the public cannot immediately bonus — SEBI wants the freshly raised capital to sit first.

Partly-paid shares. For listed companies, partly-paid shares must be made fully paid before the bonus issue — the same substantive rule as Section 63(2)(e), applied with listing rigour.

Convertible securities. A bonus issue must not dilute the rights of holders of fully or partly convertible debentures — similar benefit has to be extended to them through reservation of shares.

If your company is listed, treat the SEBI timeline as the binding constraint and work backwards from it. The Companies Act conditions still apply in full; SEBI adds speed and process on top.

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Documents required for a bonus issue

Constitutional and board records:

• Certified copy of the Articles of Association (to verify the capitalisation clause; amendment papers if the clause was added)
• Board resolution recommending the bonus issue, with the ratio, record date and source of capitalisation
• General-meeting resolution authorising the issue (ordinary, or special if the Articles require)
• Notice and explanatory statement for the general meeting

Financial proof of sources:

• Latest audited financial statements
• Reserve reconciliation statement: free reserves, securities premium account and CRR quantified separately, with revaluation reserves explicitly excluded
• Certificate from the statutory auditor or a practising company secretary confirming the Section 63 conditions are met (mandatory in practice for listed issues; strongly advisable for all)

Capital structure:

• Confirmation that authorised capital accommodates the issue — or the Section 61/64 papers if authorised capital is being increased first (SH-7)
• Confirmation that no partly-paid shares remain outstanding, or the call-money records showing they were made fully paid

For the ROC filing:

• Form PAS-3 (return of allotment) with the board and general-meeting resolutions attached
• Updated register of members

For listed companies additionally: in-principle approval application to stock exchanges, record-date intimation, depository documentation for credit of shares.

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Bonus issue process — step by step

Step 1 — Verify the Articles and the reserves

Read the Articles for a capitalisation clause. If absent, pass a special resolution under Section 14 to insert one. In parallel, reconcile the reserves from the latest audited accounts: quantify free reserves, securities premium and CRR separately, exclude every rupee of revaluation reserve, and confirm the total comfortably covers the proposed capitalisation.

Step 2 — Check authorised-capital headroom

Compute the post-bonus paid-up capital. If it exceeds the authorised capital, increase the authorised capital first — ordinary resolution under Section 61, file SH-1, then SH-7 under Section 64 within 30 days, pay the ROC fee and stamp duty. The bonus issue cannot be allotted beyond the authorised limit.

Step 3 — Clean up partly-paid shares

If any shares are partly paid, make calls and collect the unpaid amounts so every share is fully paid-up before allotment. Document the receipts.

Step 4 — Board meeting: recommend the issue

The board passes a resolution recommending the bonus issue — specifying the ratio (e.g. 1:1), the source of capitalisation, and the record date — and convenes the general meeting. Remember Rule 14: this announcement is irrevocable. Everything above must be complete before this meeting.

Step 5 — General meeting: authorise the issue

Shareholders pass the resolution authorising the bonus issue. For listed companies, the stock-exchange intimations and in-principle approval application follow within the SEBI timelines.

Step 6 — Fix the record date and allot

On the record date, identify the eligible members from the register. The board allots the bonus shares in the approved ratio. For dematerialised holdings, credit the shares through the depositories; for physical holdings, prepare share certificates.

Step 7 — File PAS-3 within 30 days

File the return of allotment in Form PAS-3 with the ROC within 30 days of the allotment date, attaching the board and general-meeting resolutions. Update the register of members, and for listed companies complete the T+2 credit and trading steps.

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How long does it take?

| Stage | Typical time | |---|---| | Articles check and reserve reconciliation | 3–5 working days | | Authorised-capital increase (if needed) | 7–10 working days | | Partly-paid cleanup (if needed) | 5–15 working days | | Board meeting to general meeting (notice period) | 21 days clear notice (shorter with consent, where permitted) | | Record date to allotment | 2–5 working days | | PAS-3 filing | Within 30 days of allotment (statutory) | | Total, straightforward private-company issue | 4–7 weeks | | Listed-company issue | Driven by SEBI T+2 and 15-day/2-month outer limits |

The notice period for the general meeting is usually the longest single stretch. Where all shareholders consent in writing, shorter notice is possible for private companies — but the consent must be genuine and documented.

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The tax treatment — company and shareholder

For the company: capitalising reserves is not a taxable event. No income arises, no expenditure is incurred — it is a balance-sheet reclassification. The company pays no tax on the bonus issue itself.

For shareholders on receipt: nothing is taxable. Bonus shares are capital accretion, not dividend income, and Section 63(3)'s bar on bonus-in-lieu-of-dividend keeps the two conceptually apart. The shareholder's cost of acquisition for the bonus shares is deemed to be nil under Section 55(2)(aa)(iiia) of the Income-tax Act.

For shareholders on sale: the full sale consideration (minus the nil cost) is taxed as capital gains. The holding period for the bonus shares runs from the date of their allotment — not from the date the original shares were bought. For listed shares, short-term gains (held 12 months or less) are taxed at 20% and long-term gains above the annual threshold at 12.5% under the regime effective from 23 July 2024; for unlisted shares the holding threshold is 24 months with long-term gains at 12.5% without indexation. [NEEDS VERIFICATION — confirm current rates and thresholds at the time of the transaction, as Finance Act changes apply.]

Keep the allotment advice and the PAS-3 acknowledgment permanently — they are the shareholder's proof of the acquisition date if the tax department ever asks.

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How ComplyKart helps in this entire process

Reserve and Articles verification. We reconcile your reserves from the audited accounts — stripping out revaluation reserves and quantifying each permitted source — and verify the Articles' capitalisation clause before the board ever meets. This is the step that prevents defective issues.

Authorised-capital and partly-paid cleanup. If headroom is short, we handle the Section 61/64 increase (SH-7) first. If partly-paid shares exist, we manage the call process so the capital structure is clean before allotment.

Board and shareholder documentation. We draft the board resolution, the general-meeting notice and explanatory statement, and the shareholder resolution — in the correct sequence, with the ratio, source and record date precisely stated.

Allotment and PAS-3 filing. We prepare the allotment papers, update the register of members, and file PAS-3 within the 30-day window, tracking it to approval.

Listed-company coordination. For listed issues, we run the SEBI timetable — in-principle approval, record-date intimations, depository coordination — against the T+2 and 15-day/2-month outer limits.

What we will not do: we will not certify a bonus issue out of revaluation reserves or any other impermissible source — the issue would be void and we will tell you so upfront. We will not help announce a bonus before the verifications are complete, because Rule 14 makes the announcement irrevocable. And we will not structure a bonus "instead of" a declared dividend to dress up a distribution the company cannot afford.

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What happens after the bonus issue

In the first 30 days: PAS-3 is filed and approved; the ROC's master data reflects the higher paid-up capital. Share certificates are issued or demat credits completed. The register of members shows the new holdings. For listed companies, trading in the bonus shares is live from T+2.

In the first 6 months: the increased paid-up capital flows into the next annual return (MGT-7) and the board's report. If the company has borrowings with covenants linked to net worth or capital, check whether the reclassification affects any covenant calculation — it rarely does adversely, but lenders should be informed where agreements require it. Review whether the authorised capital now has enough headroom left for the next planned issue (ESOP allotments, for instance).

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The recurring compliance you are signing up for

A bonus issue is a one-time event, not a continuing compliance stream — but it leaves footprints:

• Event-based: PAS-3 within 30 days of every allotment (this filing, and any future ones).
• Annual: the enlarged paid-up capital and shareholding pattern flow into MGT-7; the register of members must always reconcile with the filed capital.
• Ongoing: if the company later issues shares at a premium, the securities premium account rebuilds — a future bonus remains possible. If reserves are later revalued upward, remember those gains can never feed a bonus.

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Common mistakes and how to avoid them

Capitalising revaluation reserves. The single most common and most fatal error. Always reconcile reserves source-by-source before the board meeting.

Announcing before verifying. Rule 14 makes the board's recommendation irrevocable. Complete the Articles check, reserve math and capital headroom first.

Forgetting the general meeting. A board-only bonus issue is defective. The shareholder authorisation is mandatory.

Allotting beyond authorised capital. Compute post-bonus paid-up capital against authorised capital in Step 2, not after allotment.

Leaving partly-paid shares outstanding. Make every share fully paid before the allotment date.

Missing the PAS-3 deadline. 30 days from allotment. Late filing draws additional fees and, beyond that, adjudication exposure.

Treating bonus as dividend substitute. Section 63(3) forbids it, and shareholders expecting cash will not be satisfied with paper anyway — communicate what a bonus is and is not.

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Sources

This page is built on the Companies Act, 2013 — particularly Sections 61 (alteration of share capital), 63 (issue of bonus shares) and 64 (notice of alteration) — the Companies (Share Capital and Debentures) Rules, 2014 (Rules 12 and 14), the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (Regulation 295) and SEBI's October 2024 circular on T+2 credit and trading of bonus shares, and the Income-tax Act, 1961 (Section 55(2)(aa)(iiia)) for the cost-of-acquisition position. Practitioner commentary from Taxmann, ClearTax, TaxGuru and CAClubIndia was used for procedural detail. Where a claim could not be verified against a primary source, it is marked [NEEDS VERIFICATION].

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