Bonus Shares Section: Section 63 of the Companies Act, 2013
When a company performs well, it doesn’t always reward shareholders with cash.
- Sometimes, it rewards them with something quieter.
- Something that doesn’t move money immediately.
- Something that increases ownership instead.
That “something” is bonus shares.
And in Indian company law, the entire concept of bonus shares is governed by Section 63 of the Companies Act, 2013.
If you’re a director, shareholder, startup founder, or even an investor trying to understand what bonus shares actually mean, this section matters more than it appears.
What Are Bonus Shares, Really?
In plain language, ISSUE OF BONUS SHARES means:
👉 an offer of free additional shares to existing shareholders
No payment.
No bidding.
No fresh investment.
Shareholders receive extra shares in proportion to their existing holding.
If you own 100 shares and the company declares a 1:1 bonus, you receive 100 more—free.
Why Companies Issue Bonus Shares
Bonus shares are not charity.
They are a strategic decision.
Companies issue bonus shares when:
- they have accumulated profits
- they want to capitalise reserves
- they want to reward long-term shareholders
- they want to signal financial strength
Importantly, cash does not go out of the company.
Only reserves are converted into share capital.
Bonus Shares Section Under Company Law
The bonus shares section under Indian law is Section 63 of the Companies Act, 2013.
This section lays down:
- where bonus shares can come from
- what conditions must be met
- what is strictly prohibited
Without complying with Section 63, a bonus issue is invalid.
Section 63 of the Companies Act, 2013—The Legal Backbone
Section 63 of the Companies Act, 2013, states that a company may issue fully paid-up bonus shares to its members, provided certain conditions are fulfilled.
The law does not allow flexibility here.
Bonus shares are permitted only in the manner prescribed.
From Which Reserves Can Bonus Shares Be Issued?
This is one of the most important parts.
Bonus shares can be issued out of which reserve?
Section 63 allows bonus shares to be issued only from:
- free reserves
- securities premium account
- capital redemption reserve account
That’s it.
No other source is permitted.
What Is Strictly Not Allowed?
The law is very clear on prohibitions.
Under Section 63, bonus shares cannot be issued:
- in lieu of dividends
- out of revaluation reserves
- if shares are partly paid
- if statutory dues are unpaid
The idea is to prevent cosmetic balance-sheet manipulation.
Conditions for Issue of Bonus Shares as per Companies Act, 2013
Let’s talk about the conditions for the issue of bonus shares as per the Companies Act, 2013.
A company must ensure:
- Authorization in Articles of Association
- Approval in general meeting
- Shares are fully paid
- No default in deposits or debt securities
- No default in statutory dues
Miss even one condition, and the bonus issue fails legally.
Articles of Association—The First Checkpoint
Before even planning a bonus issue, directors must check:
👉 Do the Articles of Association allow bonus shares?
If not, the Articles must be amended first.
Skipping this step is a common mistake—and a costly one.
Resolution for Issue of Bonus Shares
A bonus issue is not a board-only decision.
A resolution for the issue of bonus shares must be passed by shareholders in a general meeting.
This is mandatory.
The board can recommend.
Shareholders must approve.
Ordinary or Special Resolution?
A common question is
👉 Issue of bonus shares: ordinary or special resolution?
Under Section 63, an ordinary resolution is sufficient, unless:
- the Articles demand a special resolution
So always read the articles carefully.
Procedure for Issue of Bonus Shares Under Companies Act, 2013
The procedure for the issue of bonus shares under the Companies Act, 2013, generally follows this flow:
- Check Articles of Association
- Convene Board Meeting
- Recommend bonus issue
- Approve bonus ratio
- Call general meeting
- Pass shareholder resolution
- Fix record date
- Allot bonus shares
- File ROC forms
Each step has documentation and timelines attached.
Bonus Shares Are Not “Free Money”
This needs clarity.
While bonus shares are free to shareholders, they are not free for the company.
They:
- reduce free reserves
- increase share capital
- change financial ratios
Bonus shares reflect redistribution—not creation—of wealth.
Impact of Bonus Shares on Shareholders
For shareholders:
- number of shares increases
- percentage holding remains the same
- market price adjusts proportionally
So while wealth doesn’t instantly increase, ownership deepens.
Why Section 63 Is So Strict
The law wants to prevent companies from:
- showing fake growth
- manipulating share prices
- misleading investors
That’s why Section 63 of the Companies Act, 2013, sets strict boundaries.
Bonus Shares vs Dividends
Dividends:
- involve cash outflow
- reduce liquidity
Bonus shares:
- involve capitalisation of reserves
- retain cash
That’s why companies with strong reserves but cash constraints prefer bonus issues.
Real-Life Example
A company has:
- ₹10 crore free reserves
- ₹5 crore share capital
It declares a 1:1 bonus.
Result:
- Share capital becomes ₹10 crore
- Free reserves are reduce to ₹5 crore
No cash movement.
Balance sheet reshaped.
Common Mistakes Companies Make
From practical experience, these mistakes are frequent:
- issuing bonus without the Articles' approval
- using revaluation reserves
- not clearing statutory dues
- incomplete filings
- incorrect ratio calculations
Each of these can invalidate the bonus issue.
Why Bonus Shares Matter for Long-Term Investors
Bonus shares signal:
- confidence
- retained earnings
- long-term outlook
That’s why markets often react positively—psychologically, if not financially.
Final Thoughts
To summarize:
- The bonus shares section is governed by Section 63 of the Companies Act, 2013
- ISSUE OF BONUS SHARES means an offer of free additional shares to existing shareholders
- Bonus shares can be issued only out of free reserves, securities premiums, or capital redemption reserves.
- They cannot replace dividends
- Proper resolutions and procedures are mandatory
Bonus shares look simple.
But legally, they are anything but casual.
🔗 Planning to Issue Bonus Shares or Unsure About Compliance?
A bonus issue may look straightforward, but one missed condition can make the entire allotment invalid and attract regulatory scrutiny. If your company is planning a bonus issue or needs help with resolutions, filings, or reserve eligibility, it’s safer to get clarity before proceeding. You can explore professional assistance for bonus share issuance and Companies Act compliance at Callmyca.com.
