Bonus Issue and Share Split Under Companies Act, 2013

INTRODUCTION

Bonus issue and split of shares are ways of rewarding the shareholders. Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are the company’s accumulated earnings which are not given out in the form of dividends but are converted into free shares. There are no additional costs involved, and the shares are given based on the current holding of shareholders. 

A stock split or a sub-division of shares is a decision by a company to increase its number of outstanding shares by reducing the face value of the shares of companies. Therefore, if a company decides to split the stock, instead of one share of a particular value, the shareholder will have two or more shares (depending on the ratio of the split of shares) of the same yet equally divided value. A stock split does in no way dilute the value of the existing shares and therefore, though the number of shares increases, the underlying value of each share remains the same.

This article briefly explains the provisions for Bonus Issue and Share Split under Companies Act, 2013 (“CA, 2013”) and its implication under the Income Tax Act, 1961 (“IT Act, 1961”).

BONUS ISSUE

Section 63 of the CA, 2013 read with Rule 14 of The Companies (Share Capital and Debentures) Rules, 2014 deals with the provisions of Issue of Bonus Shares.

• Sources of Issue:

A company may issue fully paid-up bonus shares to its members out of 

1. free reserves, 
2. securities premium account or 
3. the capital redemption reserve account.

An issue of bonus shares cannot be made by capitalizing the reserves created by revaluation of assets.

• Conditions for Issuance of bonus shares:

1. ensure the articles of association authorizes for bonus issue. If not then the Articles of Association needs to be altered as per the provisions of the CA, 2013.
2. ensured that the authorized share capital of the company is sufficient for the issuance of bonus shares. If not, then the authorized share capital should be increased and the memorandum of association of the company shall have to be altered by following the provisions of the CA, 2013. 
3. the company shall not have defaulted in payment of any interest or principal in respect of fixed deposits or debt securities or has not defaulted in payment of any statutory dues of the employees such as contribution to provident fund, gratuity, and bonus.
4. partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up.
5. shall not be issued in lieu of dividend.
6. on the recommendation of the board of directors, the issue has been authorized in the general meeting.
7. The company which has once announced the decision of its board of directors recommending a bonus issue, shall not subsequently withdraw the same.

• Procedure for Issue of bonus shares:

1. convening a board meeting for deciding the ratio of issue of bonus shares, approving the issue of bonus shares subject to the approval of shareholders and fixation of date of the general meeting of the shareholders.

2. issuance of at-least twenty-one clear days’ notice to the shareholders of the company for convening the meeting for approval of the proposed issue of bonus shares.
3. convening of the extraordinary general meeting for the obtainment of approval of the shareholders for approving the issuance of bonus shares.
4. convening of the meeting of the board of directors of the Company for allotment of bonus shares to the shareholders.
5. company to file Form PAS-03 with the Registrar of Companies within 30 days from the date of allotment of shares.
6. recording the entries of issue of bonus shares in the Registers of Members maintained.
7. issue of share certificates within two months from the date of allotment of bonus shares to the shareholders.
8. filing of corporate action form with the depositories for the credit of shares to shareholders holding shares in demat form.

• Tax Aspects of bonus shares:

The bonus shares are taxable in the hands of shareholders at the time of sale of bonus shares. The cost of acquisition of bonus shares is considered as zero as the shareholders. The shareholders have to pay short-term or long-term capital gain tax, as the case may be, at the time of sale of bonus shares. The tax is to be paid on the sale price of such shares. 

SUB-DIVISION OF SHARES

Pursuant to provisions of Section 61 of the CA, 2013, a company may sub-divide its shares into shares of smaller amount than is fixed by memorandum.

• Procedure for sub-division/split of shares:

1. split of shares is to be authorized by the articles of association of the Company. In case of absence of enabling provisions, amend the articles of association of the Company accordingly.
2. convening the meeting of board of directors for approving the reduced face value of shares and fix the date of general meeting of the shareholders.
3. issuance of at-least twenty-one clear days’ notice to the shareholders of the company for convening the meeting for approval of the split of shares.
4. convening of the extraordinary general meeting for the obtainment of approval of the shareholders for approving the split of shares.   
5. Company to file form SH-07 with the Registrar of Companies within 30 days from the date of passing of resolution by the shareholders of the Company.
6. issue of new share certificates to the shareholders of the Company according to sub-division of shares and filing of corporate action form with the depositories for credit of new shares with reduced price and cancellation of existing shares. 
7. recording the necessary entries in the Register of Members.   
8. altering the capital clause in all the copies of memorandum of association available with the company.

• Tax Aspects of shares split:

In case of split of shares, when the new shares are allotted, the total value of investment remains same, however the cost of acquisition per share is reduced. In other words, the total value of investment is divided by the number of shares with the investor post split to derive the investment value per share. When the investor sell the shares, the cost of acquisition will be the value per share derived post-split. 

BENEFITS OF ISSUE OF BONUS SHARES AND SPLIT OF SHARES

The following are few of the reasons for the companies to opt for issuance of bonus shares and split of shares.

1. A bonus issue is considered as an alternative by many companies to dividends. It increases the share capital of the Company and makes it attractive for investors. It creates more liquidity and increases retail participation.
2. Bonus shares are essentially the capitalization of profits. This enhances the company’s creditworthiness.   
3. The earning per share is reduced as the number of shares is increased by issue of bonus shares. However, the value of the company remains the same.   
4. The value per share is reduced by split of shares, however the valuation of the Company remains the same.

Author: Nisha Jhawar, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at nisha@rna-cs.co.in.