Bonus Issue of Shares Under Section 63: Eligible Reserves, Conditions and PAS-3

A bonus issue does not bring new cash into the company. Instead, the company uses an eligible reserve to increase its paid-up share capital and gives fully paid shares to existing shareholders. So the first question is not simply whether the company has enough reserves. It must first identify which reserve it can legally use and then complete the conditions under Section 63 before allotting the shares.

This article explains the Companies Act requirements. A listed company must also follow the applicable SEBI rules. Companies should also check whether any dematerialisation requirements apply to them before making the allotment.

Only three sources can fund a Section 63 bonus issue

Section 63 of the Companies Act, 2013 permits fully paid bonus shares to be issued out of three sources: free reserves, the securities premium account, and the capital redemption reserve account. The same section expressly blocks a bonus issue funded by reserves created from revaluation of assets.

• Free reserves: available free reserves can be capitalised, subject to the statutory conditions and the company’s actual reserve position.
• Securities premium: Section 52 separately recognises the use of the securities premium account for issuing unissued shares to members as fully paid bonus shares.
• Capital redemption reserve: Section 55(4) permits this reserve to be used for paying up unissued shares to be issued as fully paid bonus shares.
• Revaluation reserve: it is not an eligible source merely because it appears within reserves and surplus; Section 63 specifically excludes reserves created by revaluation of assets.

This distinction is important. A company may show a large amount under reserves in its balance sheet, but that does not mean the entire amount can be used for a bonus issue.

The company must clear the statutory gates before capitalising reserves

A bonus issue is not just an accounting entry. Before using its reserves for bonus shares, the company must satisfy the conditions given in Section 63.

1. The articles must authorise the issue. If the articles do not provide the required authority, the articles should be amended through the applicable corporate process before the bonus issue proceeds.
2. The Board must recommend the bonus issue and the members must approve it in a general meeting. Section 63 says that the issue must be “authorised in the general meeting”. It does not itself say that this approval must always be through a special resolution. However, another legal provision or the company’s articles may impose an additional requirement, so the company should check its own documents before deciding the type of resolution.
3. There must be no specified default on fixed deposits or debt securities. The section refers to default in payment of interest or principal in respect of fixed deposits or debt securities issued by the company.
4. Employee statutory dues must not be in default. The section gives provident fund, gratuity and bonus as examples.
5. Outstanding partly paid shares must be made fully paid before allotment. A bonus issue under Section 63 is an issue of fully paid shares.
6. Once announced, the Board’s recommendation cannot simply be withdrawn. Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014 says that once the company has announced the Board’s decision recommending a bonus issue, the recommendation cannot later be withdrawn.

Section 63 also says that bonus shares cannot be issued instead of a dividend. The company should therefore treat and document the bonus issue as a capitalisation of reserves, not as a replacement for a dividend that would otherwise be paid.

Check whether authorised capital is enough before deciding the bonus ratio

Having enough eligible reserves is not enough. The company must also have enough authorised share capital for the new shares. Before the Board recommends a bonus ratio, the team should calculate what the paid-up capital will become after the issue. If these terms are unclear, first understand the difference between authorised, issued, subscribed and paid-up share capital.

Hypothetical example: assume a company has 20 lakh fully paid equity shares of ₹10 each, so paid-up equity share capital is ₹2 crore. It has ₹7 crore of free reserves and ₹3 crore of securities premium, but its authorised equity share capital is only ₹3 crore.

In a 1:1 bonus issue, the company would issue another 20 lakh shares of ₹10 each. It would therefore need to use ₹2 crore from an eligible reserve. Paid-up equity share capital would increase from ₹2 crore to ₹4 crore. Although the company has enough reserves, its authorised capital is only ₹3 crore. It would first need to increase its authorised capital before making the 1:1 bonus allotment. Sections 61 and 64 of the Companies Act deal with alteration of share capital and the related notice to the Registrar.

If the company also had a ₹5 crore revaluation reserve, that amount would not cure the problem. Revaluation reserve is excluded as a funding source for the Section 63 bonus issue.

What the finance and secretarial teams should check before approval

Before the proposal goes to the Board, the finance and secretarial teams should be able to show clearly why the proposed bonus ratio is legally allowed and supported by the company’s numbers. They should check:

• the latest share-capital position and the proposed number and face value of bonus shares;
• the authorised-capital headroom after the proposed allotment;
• the exact reserve account that will be capitalised and the amount available in that account;
• whether any revaluation component has been excluded from the working;
• whether the articles authorise the issue;
• the status of interest and principal on fixed deposits and debt securities;
• employee statutory-dues status; and
• whether any partly paid shares remain outstanding.

It is safer to complete these checks first and then decide the bonus ratio. Starting with a desired ratio such as 1:1 or 2:1 and checking the legal and accounting position afterwards can create avoidable problems.

File PAS-3 after allotment, but check the current filing requirements

After the company completes the approvals and allots the bonus shares, it must deal with the return of allotment. The current Rule 12 on return of allotment states that a company having share capital must file Form PAS-3 within 30 days of an allotment of securities.

One filing point is especially important. Earlier, Rule 12 had a bonus-specific requirement to attach a copy of the general-meeting resolution with PAS-3. The ICSI e-book records that this sub-rule was omitted by the 2023 amendment. This means an old PAS-3 checklist may no longer reflect the current requirements. At the time of filing, the team should check the latest MCA PAS-3 instruction kit for the current fields, validations and attachments.

Do not confuse a bonus issue with other equity routes

A bonus issue gives additional shares to existing members by using eligible reserves; the members do not pay fresh cash for those shares. It is also different from sweat equity shares, which follow a separate legal route and may be issued to eligible directors or employees for know-how, intellectual-property rights or value addition.

A practical way to handle a bonus issue is to work step by step. First, identify an eligible reserve. Then calculate the share capital after the proposed issue and check the Section 63 conditions, including defaults and any partly paid shares. Next, confirm that the articles allow the issue and complete the required member approval. After the allotment, complete the current PAS-3 filing. The company’s records should clearly show why the chosen reserve, bonus ratio and timing complied with the applicable requirements.