1. A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of—
i. its free reserves;
ii. the securities premium account; or
iii. the capital redemption reserve account:
Provided that: no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets.
2. No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares under sub-section (1 ), unless—
a. it is authorised by its articles;
b. it has, on the recommendation of the Board, been authorised in the general meeting of the company;
c. it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;
d. it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus;
e. the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up;
f. it complies with such conditions as may be prescribed.
3. The bonus shares shall not be issued in lieu of dividend.
Legal Commentary & Landmark Judgments: Section 63
Section 63 of the Companies Act, 2013 sets forth the statutory conditions precedent and permissible reserve sources for the capitalization of profits through the issuance of fully paid bonus shares, explicitly prohibiting capitalization from revaluation reserves or dividend substitution.
Before advising a company to proceed with a bonus issue, conduct a strict compliance audit on employee statutory dues and banking liabilities. If the company has defaulted on provident fund deposits, gratuity, or bank interest, Section 63(2)(c) & (d) imposes an absolute statutory bar. Issuing bonus shares while in default triggers prosecution against directors.