Pass the legal tests before selecting a bonus ratio
Section 63 permits fully paid-up bonus shares from free reserves, the securities premium account or the capital redemption reserve account. It prohibits capitalising asset-revaluation reserves for this purpose. The company must also satisfy the articles, board and general-meeting authorisation requirements, the stated default conditions and the treatment of partly paid shares. An arithmetically affordable ratio is not sufficient legal approval.
Scope: ordinary equity bonus feasibility for an unlisted company
This article addresses pre-issue feasibility under the Companies Act, not a complete listed-company transaction timetable or a tax opinion for shareholders. Read Companies Act section 63 with section 2(8) and section 2(43) and the applicable rules. The legal sources were checked on 22 October 2026. Listed securities, non-resident holdings, convertible instruments and sector-specific restrictions can introduce additional requirements and must be examined separately.
A bonus issue capitalises qualifying balances into share capital. It does not raise subscription money from members for those bonus shares. It should not be confused with a rights issue, stock split, preferential allotment, sweat equity or a cash dividend. The nominal amount of new shares drives the capitalisation working; the market price is not the amount automatically transferred from reserves.
Prepare a source-by-source eligibility schedule
Section 2(43) defines free reserves by reference to the latest audited balance sheet and availability for distribution as dividend. It excludes unrealised gains, notional gains, revaluation amounts and specified fair-value changes recognised in equity. Do not assume that every balance displayed within reserves, surplus or other equity is a free reserve. A ledger name is not the legal test.
Securities premium and capital redemption reserve are separately named sources in section 63. Preserve that distinction instead of relabelling them as free reserves. Verify the balance legally available for the proposed capitalisation, any existing utilisation and the underlying entries. Do not count the same amount twice merely because a summary schedule combines several reserves. A capital reserve or debenture redemption reserve must not be treated as an automatically eligible substitute for capital redemption reserve.
Check share numbers and authorised capital independently
For a single fully paid equity class, state the ratio unambiguously: for example, one new share for every two existing shares. Multiply the eligible existing shares by that ratio to find the new shares, and multiply the new shares by face value to calculate the reserve capitalisation. Separately compare the resulting share capital to the memorandum’s authorised capital and relevant class limits. Adequate reserves do not enlarge that maximum.
Where the existing authorised amount is insufficient, complete the legally required capital alteration and associated steps before the allotment exceeds it. The Share Capital and Debentures Rules identify Form SH.7 for the relevant capital-alteration notice under rule 15. That is distinct from completing a bonus issue. Retain a transaction-specific filing and dematerialisation checklist; this article does not replace the full allotment, register, certificate or depository workflow.
Review defaults and partly paid shares at the correct stage
Section 63(2)(c) addresses default in principal or interest on fixed deposits or debt securities issued by the company. Section 63(2)(d) addresses employee statutory dues such as provident fund, gratuity and bonus. Do not certify a clean position solely from the bank loan ledger. Obtain the relevant due-date and payment evidence, investigate exceptions and establish that the statutory conditions are met before proceeding.
Section 63(2)(e) requires outstanding partly paid-up shares on the date of allotment to be made fully paid-up. Prepare the outstanding-call and share-register reconciliation. The illustrative call-payment example assumes the unpaid amount is validly called and actually paid before allotment; it is not advice that a journal entry alone cures the issue. The source of any proposed capitalisation of unpaid amounts requires its own lawful analysis.
Announcement follows feasibility; it is not a trial balloon
Under rule 14, a company that has announced its board’s decision recommending a bonus issue must not subsequently withdraw that decision. This makes an early reserve, headroom and default review especially useful. Obtain a reasoned feasibility paper before announcement, rather than announcing a ratio and then discovering that the share capital limit or a prohibited reserve prevents it.
The articles must authorise the issue, and the company must obtain general-meeting authorisation on the board’s recommendation. Section 63 does not itself label that bonus authorisation a special resolution; articles or another required transaction step can affect the resolutions needed. Keep those separate. Bonus shares cannot be issued in lieu of dividend, and a bonus recommendation should not be presented as a substitute that discharges a cash-dividend obligation.
Keep economics separate from the legal capitalisation
For a proportionate issue within one class, each holder’s share count rises with the total count. The percentage holding can remain unchanged, and no cash is generated by the bonus issue itself. This does not prove a particular market value or shareholder tax result. Likewise, an EPS presentation following a bonus event is an accounting-standard question; it does not establish that the corporate issue was lawfully authorised.
Worked illustrations
These illustrations use fictional facts and expressly stated assumptions. Amounts are Indian rupees unless a different currency or unit is specified. They are independent examples, not findings about any actual client.
Illustrative example 1: one new share for two existing shares
A company has 1,00,000 fully paid equity shares of ₹10 each and proposes one new share for every two existing shares. It needs 50,000 new shares and ₹5,00,000 capitalisation. Verified free reserves ₹6,00,000, securities premium ₹2,00,000 and capital redemption reserve ₹1,00,000 total ₹9,00,000. After capitalising ₹5,00,000, eligible-source balances total ₹4,00,000. Assuming authorised capital of at least ₹15,00,000 and all other tests met, the amounts support the ratio.
Illustrative example 2: revaluation cannot bridge a reserve gap
Free reserves ₹3,00,000, securities premium ₹1,00,000 and asset-revaluation reserve ₹8,00,000 appear in the accounts. A proposed bonus needs ₹6,00,000. The eligible stated sources total only ₹4,00,000, leaving a ₹2,00,000 shortfall. Including the revaluation reserve to show ₹12,00,000 available would defeat the express section 63 restriction.
Illustrative example 3: capital headroom fails despite adequate reserves
Existing paid-up equity capital is ₹20,00,000; authorised equity capital is ₹25,00,000. A bonus requires another ₹10,00,000 and verified eligible reserves are ₹12,00,000. Reserves exceed the capitalisation by ₹2,00,000, but post-issue capital would be ₹30,00,000, exceeding authorisation by ₹5,00,000. The reserve test and capital-limit test give different answers; capital alteration must be resolved before excess allotment.
Illustrative example 4: reconcile unpaid amounts before allotment
The register shows 1,00,000 shares of ₹10 face value. Of these, 20,000 are paid only to ₹6 each. The outstanding amount on that block is 20,000 × ₹4 = ₹80,000. Assume the amount is validly called and paid before the bonus allotment, making every existing share fully paid. A subsequent one-for-one bonus would need 1,00,000 new shares and ₹10,00,000 capitalisation, supported separately by eligible sources and headroom. The ₹80,000 call receipt is not itself the full bonus funding.
Illustrative example 5: proportionate allotment preserves the percentage
A holder owns 60,000 of 1,00,000 shares, a 60% stake. A one-for-four bonus produces 15,000 new shares for that holder and 25,000 new shares overall. Afterwards the holder has 75,000 of 1,25,000, still 60%. This share-count calculation does not predict a market-price increase or establish a tax exemption.
Illustrative example 6: large reserves do not cure employee-dues default
Assume verified overdue employee statutory dues comprise provident fund ₹1,20,000, gratuity ₹80,000 and bonus ₹50,000, total ₹2,50,000. The company has ₹50,00,000 of eligible reserves and proposes ₹20,00,000 capitalisation. The apparent ₹30,00,000 reserve balance after the issue does not cure the default condition. Resolve the actual dues and statutory eligibility rather than netting them arithmetically against reserves.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Fix the company and security scope. | Unlisted/listed status and class rights. |
| 2 | Check the articles and recommendation sequence. | Articles and board papers. |
| 3 | Reconcile each proposed reserve source. | Latest audited balance sheet and ledger movements. |
| 4 | Exclude revaluation and other ineligible amounts. | Legal source classification. |
| 5 | Calculate new shares and nominal capitalisation. | Ratio and face-value schedule. |
| 6 | Check authorised and class capital headroom. | Memorandum and capital records. |
| 7 | Review fixed-deposit and debt-security defaults. | Due dates and payment confirmations. |
| 8 | Review employee statutory-dues defaults. | PF, gratuity, bonus and other relevant records. |
| 9 | Make outstanding partly paid shares fully paid as required. | Share register and valid payment or other lawful completion evidence. |
| 10 | Complete approvals and transaction-specific compliance. | General-meeting record, applicable filings and allotment/depository checklist. |
Sixteen practitioner FAQs
1. Can revaluation reserve fund the bonus?
No. Section 63 expressly prohibits capitalising reserves created by asset revaluation for a bonus issue.
2. Is every general-ledger reserve a free reserve?
No. Apply section 2(43), the audited-balance-sheet basis and the exclusions.
3. Is securities premium one of the named sources?
Yes. Section 63 names it separately from free reserves and capital redemption reserve.
4. Is capital redemption reserve the same as debenture redemption reserve?
No. Do not substitute one for the other merely because both names include redemption.
5. Does the calculation use market price or face value?
Nominal capitalisation uses the face value of the bonus shares; market value is a different question.
6. Do sufficient reserves automatically create capital headroom?
No. The authorised share capital remains a separate maximum.
7. Does a bonus issue bring subscription cash?
The bonus issue itself capitalises eligible balances; it does not raise cash subscription from members.
8. Can outstanding partly paid shares be ignored?
No. Section 63(2)(e) addresses making them fully paid-up on the stated allotment-date basis.
9. Are bank loans the only defaults to review?
No. Review the specifically stated fixed-deposit, debt-security and employee statutory-dues conditions.
10. Can the board announce now and withdraw if funding fails?
Rule 14 prohibits subsequent withdrawal after the company announces its board’s recommendation.
11. Is shareholder authorisation required?
Yes. Section 63 requires general-meeting authorisation on the board’s recommendation.
12. Does section 63 itself always require a special resolution?
It does not itself use that label; review the articles and separate steps needing their own resolutions.
13. Can bonus shares replace a dividend?
No. Section 63(3) prohibits issuing them in lieu of dividend.
14. Is Form SH.7 a complete bonus-issue filing package?
No. Rule 15 concerns the relevant capital alteration; complete the other applicable transaction steps separately.
15. Does this cover listed-company SEBI deadlines?
No. The scope is unlisted-company feasibility; a listed issue requires its additional current framework.
16. Does a successful reserve calculation establish shareholder tax or FEMA treatment?
No. Those analyses depend on the holders, instruments and applicable laws and require separate checks.
Working-paper organisation
Keep the source documents, calculation and final conclusion together for the same entity and period. If using assurePractice or other assureOffice tools, use only confirmed available functions and retain this evidence with the output.
Conclusion
Approve a bonus ratio only after documenting permissible sources, authorised headroom, default checks and the share register. Completing those checks before announcement avoids a recommendation that the company cannot lawfully implement or freely withdraw.