Issue of Bonus Shares in a Private Limited Company

The issue of bonus shares in a private limited company is a strategic way to reward existing shareholders without affecting cash flow. Instead of paying dividends, the company converts its free reserves or securities premium into share capital and allots additional shares at no extra cost.

This move strengthens the company’s capital structure, boosts shareholder confidence, and reflects financial stability—in addition to compliance with the provisions of the Companies Act, 2013. In short, issuing bonus shares is a smart method to acknowledge growth, enhance value, and optimize equity without bringing in fresh funds.

In this blog, we’ll walk you through the key legal provisions, eligibility criteria, step-by-step procedure, board and shareholder approvals, ROC filing requirements, and common compliance mistakes to avoid to make the entire process of issuing bonus shares clearer and easier for company owners and professionals.

Table of Contents

Legal Framework Governing Bonus Shares Under the Companies Act, 2013

Legal Provision / Rules	Key Requirements
Section 63 of the Companies Act, 2013	This section permits the capitalization of free reserves, the securities premium account, and the capital redemption reserve for the purpose of issuing bonus shares.
Rule 14 of the Companies (Share Capital & Debentures) Rules, 2014	This rule states that the company must not have defaulted in the payment of deposits, interest, statutory dues, or loan repayments at the time of issuing bonus shares.
Section 173 and 174 – Board Meetings	These sections mandate that the Board Meeting must be duly convened with proper notice and the required quorum to pass the resolution for issuing bonus shares.
Section 102 – Explanatory Statement	This section requires that an explanatory statement must accompany the notice of the general meeting, clearly stating the reasons and details related to the bonus issue.
Section 117 – Filing of Resolutions (Form MGT-14)	This section makes it necessary to file certain board and shareholder resolutions with the Registrar of Companies within the prescribed timelines.
Section 39 and Section 46 – Share Allotment and Share Certificates	These sections regulate the allotment of shares, the issuance of share certificates, and the maintenance of proper share-related records.

Eligibility Criteria : Issue of Bonus Shares in a Private Limited Company

The company must have sufficient free reserves, securities premium, or capital redemption reserve available for the issue of bonus shares in a private limited company.
The Articles of Association must authorize the issue of bonus shares or be amended to include such a provision.
The company should not have defaulted in the payment of loans, deposits, interest, or statutory dues at the time of issuing bonus shares.
In case of partly paid-up shares, if any, must be fully paid before the bonus issue is implemented.
The Board of Directors must approve the proposal for issuing bonus shares through a duly convened Board Meeting.
Shareholders must pass a resolution in the general meeting if required under the Articles of Association.
The company must comply with the procedural requirements prescribed under Section 63 of the Companies Act, 2013 and related rules.

Sources for Capitalization – Issue of Bonus Shares in a Private Limited Company

The primary sources for capitalization during the issue of bonus shares in a private limited company are funds already available within the business, which can be converted into share capital without bringing in additional cash. Free reserves are one of the most common sources, as these represent accumulated profits that can be utilized to reward shareholders. Similarly, the securities premium account offers another eligible source, allowing companies to deploy the excess received over the face value of shares for issuing bonus shares.

Additionally, the capital redemption reserve can be capitalized when bonus shares are issued, particularly in cases where shares have been previously redeemed. These sources ensure that the bonus issue is supported by genuine internal funds, maintains financial transparency, and aligns with the legal framework under Section 63 of the Companies Act, 2013. By leveraging these internal reserves, a private limited company can strengthen its capital structure and enhance shareholder value without affecting liquidity.

Step-by-Step Procedure of Issue of Bonus Shares in a Private Limited Company

S. No.	Step	Procedure
1	Check Articles of Association	Verify whether the Articles authorize the issue of bonus shares, and amend them if required.
2	Assess Eligible Reserves	Identify free reserves, securities premium, or capital redemption reserve available for capitalization.
3	Conduct Board Meeting	Hold a Board Meeting to approve the bonus issue proposal and fix a date for the general meeting, if required.
4	Issue Notice for General Meeting	Send notice with an explanatory statement to shareholders, if Articles mandate shareholder approval.
5	Pass Shareholder Resolution	Obtain approval through an ordinary resolution or special resolution, based on the Articles.
6	Ensure No Defaults & Compliance	Confirm that the company is not in default of loans, deposits, or statutory dues, and that partly paid shares are fully paid-up.
7	File Resolutions with ROC	File required resolutions in Form MGT-14 where applicable.
8	Allot Bonus Shares	Finalize and approve allotment and enter details in the register of members.
9	File Form PAS-3 with ROC	File the return of allotment in Form PAS-3 within the prescribed timeline along with necessary attachments.
10	Issue Share Certificates	Issue share certificates or update demat records within the prescribed period.

Common Challenges and Compliance Mistakes to Avoid

Challenge / Mistake	Why It Occurs	Impact on the Issue of Bonus Shares in a Private Limited Company
Insufficient Free Reserves	Companies miscalculate or assume reserves are adequate without proper verification.	It leads to non-compliance with Section 63 and may invalidate the bonus issue.
Not Amending Articles of Association	The Articles do not explicitly authorize bonus issues, and companies overlook this requirement.	It makes the bonus issue legally unenforceable and subject to objections.
Default in Statutory or Loan Payments	Companies fail to check defaults in deposits, interest, or tax dues.	It restricts eligibility and may bar the company from issuing bonus shares.
Issuing to Partly Paid-Up Shareholders	Lack of attention to the status of partly paid shares.	Bonus shares cannot be allotted, causing delays and compliance breaches.
Using Ineligible Reserves	Companies mistakenly use revaluation reserves for capitalization.	It violates the Companies Act and results in invalid capitalization.
Failure to File PAS-3 Timely	Delay or oversight in filing the return of allotment with the ROC.	It may attract penalties and lead to incomplete statutory records.
Improper Board or Shareholder Approval	Resolutions are not passed correctly or quorum requirements are ignored.	It makes the approval process defective and legally challengeable.
Inadequate Documentation	Missing share certificates, registers, or meeting minutes.	It creates gaps in statutory compliance and shareholder records.

Conclusion – Issue of Bonus Shares in a Private Limited Company

The issue of bonus shares in a private limited company is an effective way to reward shareholders, strengthen capital structure, and showcase financial stability without impacting cash reserves. When carried out in compliance with Section 63 of the Companies Act, 2013, and related rules, it becomes a legally sound and strategically beneficial corporate action.

By understanding the eligibility criteria, legal framework, step-by-step procedure, and common challenges, companies can ensure a seamless and compliant bonus issue process. We at My Legal Business LLP with proper planning and adherence to statutory requirements, help you to process the issue of issue of bonus shares in a Private Limited Company that can enhance shareholder value, improve trust, and support long-term business growth.