Definition
The issuance of additional free shares to existing shareholders by capitalising the company's accumulated free reserves — no cash consideration is paid by shareholders; the existing reserves are converted into paid-up capital and distributed as new shares.
A bonus issue under Section 63 of the Companies Act, 2013 is an accounting exercise: the company transfers amounts from free reserves, securities premium account, or capital redemption reserve to the paid-up share capital account, and issues corresponding shares to existing shareholders at no cost. No new money comes into the company and no money goes out. The total wealth of shareholders remains unchanged immediately after the bonus (the share price falls proportionately). The purpose: (a) convert undistributed reserves into permanent paid-up capital; (b) improve liquidity by reducing per-share price (making shares more affordable for retail investors); (c) signal confidence in future earnings. A company cannot issue bonus shares from revaluation reserves.
Statutory Definition
Section 63(1), Companies Act, 2013: 'A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of — (i) its free reserves; (ii) the securities premium account; or (iii) the capital redemption reserve account.' Section 63(3): 'The company shall not capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares, if it has, on the date of the Board meeting, made any default in payment of interest or principal in respect of fixed deposits or debt securities issued by it.'
Etymology & Origin
From Latin 'bonus' (good, advantageous) + 'issue' (issuance of new shares). A 'bonus issue' gives shareholders additional shares as a 'bonus' — without any payment required. The 'bonus' reflects the company's ability to capitalise its accumulated reserves.
Full Legal Analysis
Bonus Issue: Converting Reserves Into Shares
A bonus issue creates new shares from nothing — no new capital, no new investors, just the accounting transfer of reserves into equity capital. The immediate financial effect on shareholders is zero (share price adjusts proportionately). But the long-term effects are significant: more shares in circulation make trading more liquid, and the psychological effect of receiving “free” shares often boosts investor sentiment.
The Bonus Issue Accounting
For a 1:1 bonus issue (1 new share for every 1 existing share): (a) Before bonus: 100,000 shares outstanding @ Rs. 10 face value; free reserves of Rs. 10 lakh; share price Rs. 100. (b) Transfer: Rs. 10 lakh from free reserves → paid-up capital. (c) Issue 100,000 new shares at Rs. 10 face value each. (d) After bonus: 200,000 shares outstanding; paid-up capital doubles; free reserves decrease by Rs. 10 lakh; share price halves to Rs. 50 (theoretically). Net wealth of any shareholder: unchanged (same % of a company with same total value). The bonus creates no new wealth — it redistributes existing wealth from reserves to paid-up capital, represented by more shares of a lower price.
Why Companies Issue Bonus Shares
(a) Liquidity: Lower per-share price (after adjustment) makes shares accessible to more retail investors, improving trading volume. (b) Signalling: A company issues bonus shares only if it believes it can sustain the higher paid-up capital — it signals confidence in future earnings. (c) Obligation to maintain dividend: Once bonus shares are issued, maintaining the same dividend per share requires more total dividend payment — a commitment the company implicitly makes. (d) Tax efficiency: Bonus shares are received free and taxed only when sold — deferring the tax event compared to receiving the same reserves as dividends.
“A bonus issue is an accounting magic trick that creates no wealth but changes everything about how the wealth is represented. More shares, same value, lower per-share price — but a company that issues bonus shares is saying: we have reserves we don’t need to keep as cash; we trust our future enough to make this capital permanent.”
This Term in Indian Statutes
Companies Act, 2013, 2013
"A company may issue fully paid-up bonus shares to its members out of its free reserves, the securities premium account, or the capital redemption reserve account."
Bonus issue: capitalisation of reserves into paid-up capital; free shares to existing shareholders proportionately; no revaluation reserves; no default on debt
