Can Capital Reserve Be Used To Issue Bonus Shares By CS Manish Tiwari


Dear Professional Colleagues,

Bonus Shares are issued for capitalising the Profits and/ or Reserves of the Company.

Companies Act, 2013 has provided distinguished provisions for the same unlike in erstwhile Companies Act, 1956 where reference had to be taken of the Articles of Association of the Company while doing so.

As per sub-section (1) of Section 63 of the Companies Act, 2013:

A Company may issue Bonus Shares out of- its free reserves; Securities Premium Account; Capital Redemption Reserve Account. Further, it has been provided that Issue of Bonus Shares shall not be made out of Capitalising Reserves created out of revaluation of Reserves. Free Reserves means such reserves of the Company which is available for distribution as Dividend.

In this regard, there had been even a Landmark Judgement of the Supreme Court, India in the case of Bhagwati Developers Vs. Peerless General Finance & Investment Co. (2005)that an unlisted Company can issue bonus shares out of Revaluation Reserve which was made impugned by the first proviso to sub-section (1) of Section 63 of the Companies Act, 2013.

Capital reserve has nowhere been specifically defined in the Companies Act, 2013 or anywhere in Accounting Standards but taking the cue of references made of Capital Reserve at various instances in Accounting Standard 12, 14 and elsewhere we can construe that Capital Reserve is generated out of Capital Gains of the Company which may include profit out of sale of undertakings, profit out of revaluation of Capital Assets, profit made on issue of Shares at Premium, etc.

Thus, we may conclude that in order to issue Bonus Shares out of Capital Reserve we need to first check nature of such Capital Reserve. If the profit of the Company which would have been available for distribution as Dividend (Example: sale of Fixed Assets or Sale of Undertaking) had been transferred to Capital Reserve during some year, then that balance of Capital Reserve may be used for issue of Bonus Shares.

The only restriction has been levied is on the use Revaluation Reserve for the issue of Bonus Shares.  

 

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