Bonus issue explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A bonus issue turns reserves into share capital; no cash moves and total equity stays the same. A rights issue offers new shares to existing holders for cash, so equity grows by the cash raised. This guide gives the entries for both, the sources the Act allows for a bonus, and the arithmetic behind the value of a right, with one invented company taken through both. The legal process for a bonus is handled by our bonus issue service; this article covers the accounts.
A bonus may be made only out of distributable reserves (the Act's defined term), the securities premium account or the capital redemption reserve account, and never by capitalising reserves created by revaluation of assets (section 63(1)). The entry debits those reserves and credits share capital; total equity does not change. A rights issue is a normal issue for cash to existing holders in proportion to their holding (section 62(1)(a)); its premium goes to securities premium. The value of a right is the market price before the offer less the theoretical ex-right price.
What the Act requires
| Source | What it requires | What it means in the books |
|---|---|---|
| Section 63(1) | Fully paid-up bonus shares may be issued out of distributable reserves (section 63 uses the Act's defined term), the securities premium account or the capital redemption reserve account | Debit one or more of these reserves; no other balance may fund a bonus |
| Section 63(1) proviso | No bonus by capitalising reserves created by revaluation of assets | A revaluation reserve stays where it is |
| Section 63(2) | Needs authority in the articles and in a general meeting on the Board's recommendation; no default in interest or principal on fixed deposits or debt securities; no default in employees' statutory dues; partly paid shares made fully paid; prescribed conditions met | Check each point before posting the entry |
| Section 63(3) | Bonus shares are not issued in lieu of dividend | A bonus is not a substitute for a dividend payment |
| Section 52(2)(a) | Securities premium may be applied in issuing unissued shares as fully paid bonus shares | Securities premium is a permitted source |
| Section 62(1)(a) | Further shares are first offered to equity holders in proportion to their paid-up capital by a letter of offer, open for a period stated there, with a right to renounce unless the articles say otherwise | A rights issue is an issue for cash to existing members, not a bonus |
The section posts are Section 63: bonus shares, Bonus shares FAQs and Section 62: further issue. Use them for the notice period and the prescribed conditions.
Method
Bonus issue. 1. Fix the ratio. 2. Compute bonus shares and their face value. 3. Decide which reserves to use; securities premium and the capital redemption reserve are capital reserves, so many companies use them first, but the Act sets no order. 4. Debit the reserves, credit Share capital (or Bonus shares issued account until allotment). 5. Restate the equity table; the total must not move.
Rights issue. 1. Fix the ratio and the offer price. 2. On application and allotment, debit Bank, credit Share capital for the face value and Securities premium for the rest. 3. To value a right, compute the theoretical ex-right price: the total of the market value of shares held and the rights money, divided by the shares after the issue. The value of a right is the price before the offer less this figure.
Worked example: Bhavna Textiles Private Limited
The entity and all figures in this example are invented for illustration.
Before any issue, Bhavna Textiles has 1,00,000 equity shares of 10 each. Its reserves: securities premium 2,00,000, general reserve 6,00,000 and retained earnings 4,00,000. All shares are fully paid and the other conditions of section 63(2) are met.
Step 1: bonus of one share for every four held.
- Bonus shares: 1,00,000 / 4 = 25,000 shares; face value 25,000 x 10 = 2,50,000.
- Source: securities premium 1,00,000 and general reserve 1,50,000.
| Particulars | Debit | Credit |
|---|---|---|
| Securities premium Dr | 1,00,000 | |
| General reserve Dr | 1,50,000 | |
| To Share capital | 2,50,000 |
| Equity | Before | After bonus |
|---|---|---|
| Share capital | 10,00,000 | 12,50,000 |
| Securities premium | 2,00,000 | 1,00,000 |
| General reserve | 6,00,000 | 4,50,000 |
| Retained earnings | 4,00,000 | 4,00,000 |
| Total equity | 22,00,000 | 22,00,000 |
Step 2: rights issue of one share for every five held, at 40 per share. After the bonus the company has 1,25,000 shares, so 25,000 new shares are offered, all taken up. Face value 10, premium 30.
| Particulars | Debit | Credit |
|---|---|---|
| Bank Dr (25,000 x 40) | 10,00,000 | |
| To Share capital (25,000 x 10) | 2,50,000 | |
| To Securities premium (25,000 x 30) | 7,50,000 |
| Equity | After bonus | After rights |
|---|---|---|
| Share capital | 12,50,000 | 15,00,000 |
| Securities premium | 1,00,000 | 8,50,000 |
| General reserve | 4,50,000 | 4,50,000 |
| Retained earnings | 4,00,000 | 4,00,000 |
| Total equity | 22,00,000 | 32,00,000 |
Step 3: value of a right. Assume the shares are worth 70 each just before the rights offer.
| Working | Amount |
|---|---|
| Value of 5 shares held (5 x 70) | 350 |
| Rights money for 1 new share | 40 |
| Value of 6 shares | 390 |
| Theoretical ex-right price (390 / 6) | 65 |
| Value of the right per share held (70 less 65) | 5 |
| Value per new share taken up (65 less 40) | 25 |
Check. Equity after both steps: 22,00,000 (unchanged by the bonus) + 10,00,000 rights money = 32,00,000. Debits and credits agree in both entries (2,50,000 and 10,00,000). A holder of 500 shares is worth 500 x 70 = 35,000 before the offer; after taking up 100 new shares for 4,000, the 600 shares are worth 600 x 65 = 39,000 = 35,000 + 4,000. The 70 is an assumed fair value, for arithmetic only.
How it shows in the financial statements
Under Schedule III, Division I, share capital and the reserves appear in the equity part of the balance sheet, with the reserves shown by head. The share capital note gives a reconciliation of shares at the start and end of the year and, for the five years before the balance sheet date, the number and class of shares allotted as fully paid up by way of bonus shares. Companies on Ind AS compute earnings per share under Ind AS 33; see our Ind AS 33 worked guide.
Common mistakes
- Using the revaluation reserve for a bonus, which the proviso to section 63(1) forbids.
- Posting the bonus entry before checking the section 63(2) conditions or the authority in the articles.
- Crediting a bonus issue to securities premium or reserves; the credit is share capital.
- Treating the bonus as income of the shareholders in the company's books. It changes the form of equity, not its total.
- Forgetting that bonus shares also change the earnings per share of earlier periods (see AS 20 in our guide on earnings per share).
Need help with a bonus issue?
Our team can check the source of the bonus, prepare the resolutions and the entries and file the returns. Our bonus issue page explains the process; send us the latest balance sheet and the articles.
Key takeaways
- A bonus capitalises distributable reserves, securities premium or the capital redemption reserve; never a revaluation reserve.
- The entry moves amounts within equity; total equity is unchanged.
- A rights issue raises cash; the premium goes to securities premium.
- The value of a right is the price before the offer less the theoretical ex-right price.
- Check the conditions in section 63(2) and the articles before posting.
Read next
- Redemption of preference shares: section 55, reserve and entries
- Issue, forfeiture and re-issue of shares: journal entries
- AS 20 earnings per share: basic and diluted
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.