Bonus Shares FAQs 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.
Section 63 of the Companies Act, 2013 lets a company issue fully paid-up bonus shares to its members out of three named sources, subject to six conditions. The questions people ask most are about the edges: whether partly paid shares count, whether preference shareholders get bonus shares, and whether a loss-making company can issue them. This guide answers each from the words of the section. It reads the Act in the Ministry's consolidated text (last updated 29 July 2022) and the Rules as consolidated in the Ministry's e-book, consulted on 3 October 2026; later amendments should be checked.
A company may issue fully paid-up bonus shares to its members out of its distributable reserves (the reserves defined in section 2(43); the Act uses a defined term for them), the securities premium account or the capital redemption reserve account, but never by capitalising reserves created by revaluation of assets (section 63(1)). It needs authority in its articles, a Board recommendation and authorisation in general meeting, no default on deposits, debt securities or employees' statutory dues, and any partly paid shares made fully paid (section 63(2)). Bonus shares cannot be issued in lieu of dividend (section 63(3)), and an announced Board decision cannot be withdrawn (rule 14).
The three sources
| Source | Provision | Points to note |
|---|---|---|
| Distributable reserves (the s.2(43) reserves) | s.63(1)(i), s.2(43) | Reserves that, as per the latest audited balance sheet, are available for distribution as dividend; unrealised gains, notional gains, revaluation of assets and fair-value changes recognised in equity are excluded by the definition |
| Securities premium account | s.63(1)(ii), s.52(2)(a) | Section 52(2)(a) lets it be applied towards unissued shares issued to members as fully paid bonus shares |
| Capital redemption reserve account | s.63(1)(iii), s.55(4) | Section 55(4) lets it be applied in paying up unissued shares as fully paid bonus shares |
The proviso to section 63(1) bars capitalising reserves created by the revaluation of assets. The model articles (Table F, regulation 39) speak of capitalising reserve accounts and the profit and loss account, and say the securities premium account and capital redemption reserve account may be applied in paying up unissued shares as fully paid bonus shares; the company's own articles govern.
If the new shares need more authorised capital, section 61(1)(a) lets a company authorised by its articles increase it in general meeting. See our increase of authorised capital service.
The six conditions in section 63(2)
- The articles authorise it.
- On the Board's recommendation, the general meeting authorises it.
- The company has not defaulted in payment of interest or principal on fixed deposits or debt securities it issued.
- It has not defaulted on statutory dues of employees such as provident fund, gratuity and bonus.
- Any partly paid-up shares outstanding on the date of allotment are made fully paid-up.
- It complies with the conditions prescribed.
Rule 14 of the Share Capital Rules adds one: a company that has once announced the Board's decision recommending a bonus issue shall not subsequently withdraw it. Our guide on how to issue bonus shares takes you through the steps and our board resolution for bonus shares gives the resolution.
Frequently asked questions answered from the text
Can partly paid shares receive bonus shares?
The section speaks of fully paid-up bonus shares and, in section 63(2)(e), requires partly paid-up shares outstanding on the date of allotment to be made fully paid-up. In practice this means the company settles the unpaid amount on those shares before it allots. Nothing in the section lets bonus shares themselves be issued partly paid.
Do preference shareholders get bonus shares?
Section 63(1) says the shares are issued "to its members", and holders of preference shares are members. Whether they take part, and in what class of share, is not settled by the section: it depends on the terms of the preference shares and the articles. Read those terms before deciding. The text prints nothing more.
Can a loss-making company issue bonus shares?
Section 63 prints no profit test. What it requires is a source among the three, authorised by the articles and the meeting, and compliance with the conditions. The distributable reserves in section 2(43) are those available for distribution as dividend per the latest audited balance sheet, so a company with no such reserves has to look to the securities premium account or the capital redemption reserve account, and cannot capitalise revaluation reserves. We state no further rule.
Can bonus shares be issued instead of paying a dividend?
No. Section 63(3) says bonus shares shall not be issued in lieu of dividend.
Can the Board change its mind after announcing the bonus?
Not after announcing its decision recommending a bonus issue: rule 14 says the company shall not subsequently withdraw it.
Is a general meeting needed?
Yes. Section 63(2)(b) requires authorisation in general meeting on the Board's recommendation, and clause (a) requires the articles to authorise the capitalisation.
What if the company has defaulted on a public deposit or debenture interest?
Section 63(2)(c) bars the issue if the company has defaulted in payment of interest or principal on fixed deposits or debt securities it issued; section 63(2)(d) does the same for employees' statutory dues.
Is any time limit printed for implementation?
Rule 14 as printed in the e-book carries only the non-withdrawal rule. If you need a time limit, check the articles and later amendments.
Worked example (invented names)
Harbor Foods Limited has a securities premium account of Rs 40,00,000 and a revaluation reserve of Rs 25,00,000 shown in its latest audited balance sheet. It wants to issue one bonus share for every four held on 10,00,000 shares of Rs 10 each. The number of bonus shares is 10,00,000 / 4 = 2,50,000, which at Rs 10 each needs Rs 25,00,000. It may use the securities premium account (Rs 40,00,000 is enough), but not the revaluation reserve, which section 63(1) proviso bars. It needs the articles' authority, the Board recommendation and the general meeting's authorisation, and must check the default conditions. If 1,00,000 of the existing shares are partly paid, the unpaid amount must be called and paid before allotment.
Common mistakes
- Using the revaluation reserve because it is the largest balance.
- Allotting before partly paid shares are made fully paid.
- Calling the bonus a dividend substitute.
- Announcing a bonus and then changing course.
- Leaving the articles without an authority to capitalise reserves.
Need help with a bonus issue?
We can check which reserves qualify, whether authorised capital is enough, and prepare the Board and members' resolutions and the allotment records. See our increase of authorised capital service.
Key takeaways
- Only fully paid-up bonus shares, from distributable reserves, securities premium or capital redemption reserve.
- No revaluation reserves.
- Six conditions in section 63(2), including articles, meeting and no defaults.
- Partly paid shares must be made fully paid.
- No bonus in lieu of dividend, and no withdrawal of an announced decision.
Read next
- Section 63: Issue of Bonus Shares
- Dividend Waiver and Dividend in Kind: Section 123, SS-3 and the Articles
- Funding Options for a Private Limited Company
- Board Resolution for Issue of Bonus Shares
Disclaimer: Based on the Companies Act, 2013 in the Ministry of Corporate Affairs consolidated text (last updated 29 July 2022), the Rules as consolidated in the Ministry's e-book and the other official texts named in this article, as consulted on 3 October 2026. Later amendments, notifications, circulars, forms and fees should be checked. Formats are general drafts to be adapted to the company's articles and facts. This article is general information, not legal advice; check the official text before acting.