Bonus shares: meaning, sources and conditions
Bonus shares are fully paid shares issued free to existing shareholders out of reserves under section 63. They cannot be issued from revaluation reserves.
Short answer
Bonus shares are fully paid shares issued free of cost to existing shareholders in proportion to their holdings, by capitalising a company's reserves. Under section 63 of the Companies Act, 2013, bonus shares can be issued out of free reserves, the securities premium account or the capital redemption reserve, but not out of revaluation reserves.
- Governed by
- Section 63, Companies Act 2013
- Permitted sources
- Free reserves, securities premium, capital redemption reserve
- Not permitted
- Revaluation reserves; in lieu of dividend
- Return of allotment
- Form PAS-3
Conditions for a bonus issue
A company can issue bonus shares only if several conditions in section 63(2) are met. These protect creditors and employees and ensure that the bonus is backed by genuine reserves rather than paper gains.
- The articles authorise it
- The board recommends it and shareholders approve it at a general meeting
- The company has not defaulted on interest or principal of deposits or debt securities
- It has not defaulted on statutory dues to employees such as provident fund and gratuity
- Any partly paid shares are made fully paid before the issue
How the issue is completed
Once announced by the board, a bonus issue cannot be withdrawn. Rule 14 of the Share Capital and Debentures Rules requires the bonus to be implemented within two months of the board's approval, or of the shareholders' approval where that is needed. The company may need to increase authorised capital first, and it files PAS-3 after allotment. Bonus shares change the number of shares but not the company's total equity, because reserves move into share capital.
Why it matters for startups
Startups sometimes issue bonus shares to reduce a very high per-share price before an ESOP grant or an IPO, or to rebalance the share count. A bonus issue does not bring in money and has no direct tax at issue for shareholders, though the cost of bonus shares for capital gains is generally nil. Check whether anti-dilution or conversion terms in investor instruments are affected.
Related services
Sources
Written by the Refogo Editorial Team from the official sources above and checked on 2026-10-31. Laws, rates and due dates change, and authorities often extend deadlines, so confirm your own case with a qualified professional. This is general information, not legal or tax advice. Read our editorial policy or report an error to support@refogo.com.
Common questions
Are bonus shares taxable when received?
Bonus shares are generally not taxed on receipt, but their cost is usually taken as nil when computing capital gains on sale.
Can a loss-making company issue bonus shares?
Only if it has sufficient securities premium or other permitted reserves. Free reserves cannot be negative.
Can bonus shares be issued instead of a dividend?
No. Section 63 prohibits issuing bonus shares in lieu of dividend.