Bonus shares are fully paid-up shares issued by a company to its existing shareholders at no additional cost, by capitalising the company's free reserves, securities premium, or capital redemption reserve. Under Indian law, the issuance of bonus shares is governed by Section 63 of the Companies Act, 2013.
Legal definition
Section 63(1) of the Companies Act, 2013 provides:
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.
Section 63(2) stipulates that no company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares unless: (a) it has been authorised by its articles; (b) it has, on the recommendation of the board, been authorised in the general meeting; (c) it has not defaulted in payment of interest or principal on fixed deposits or debt securities; (d) it has not defaulted in payment of statutory dues to employees; and (e) the partly paid-up shares, if any, have been made fully paid-up.
Once the bonus shares are announced, they cannot be withdrawn.
How courts have interpreted this term
Standard Chartered Bank v. Custodian (2000) 6 SCC 427
The Supreme Court held that a bonus share is a property that comes into existence with an identity and value of its own, capable of being bought and sold. The Court described bonus shares as a distribution of capitalised undivided profit, noting that they represent an allocation of accumulated profits to shareholders in the form of additional shares rather than a cash distribution.
Commissioner of Income Tax v. Dalmia Investment Trust (1964) 52 ITR 567 (SC)
The Supreme Court held that bonus shares, though issued without any payment by the shareholder, have a cost of acquisition referable to the accumulated profits that are capitalised. This decision clarified the tax treatment of bonus shares and established that the capitalisation of reserves through bonus issue does not constitute income in the hands of the shareholder.
Why this matters
Bonus shares serve as a mechanism for companies to reward shareholders without distributing cash. When a company has accumulated substantial reserves but wishes to retain cash for operational needs or expansion, a bonus issue converts those reserves into permanent share capital. The total wealth of shareholders does not change immediately — the market price per share adjusts downward proportionally — but the increased number of shares improves liquidity and makes the stock more accessible to retail investors.
For practitioners advising companies on capitalisation strategy, the conditions in Section 63(2) are critical compliance checkpoints. A company with outstanding defaults on fixed deposits, debt securities, or statutory employee dues is prohibited from issuing bonus shares. Additionally, revaluation reserves — created by upward restatement of asset values — cannot be used for bonus issues, preventing companies from inflating their share capital on the basis of notional gains.
A common misunderstanding is that bonus shares create new value for shareholders. In reality, a bonus issue is an accounting reclassification — free reserves are converted into share capital, and the proportionate ownership of each shareholder remains unchanged. The market adjusts the share price to reflect the increased number of shares, so the aggregate value of each shareholder's holding remains the same immediately after the bonus issue.
Related terms
Broader concepts:
Related procedures:
Related concepts:
Frequently asked questions
Do shareholders need to pay anything for bonus shares?
No. Bonus shares are issued fully paid-up at no cost to the existing shareholders. The company capitalises its reserves to pay for the new shares. The cost is borne by the company's accumulated profits or reserves, not by the shareholders.
Can a company issue bonus shares if it has losses?
A company can issue bonus shares only out of free reserves, the securities premium account, or the capital redemption reserve account. If a company has a debit balance in its profit and loss account (accumulated losses), it must first set off those losses against the free reserves before computing the amount available for bonus issue.
Is board approval sufficient for issuing bonus shares?
No. The board must recommend the bonus issue, but it must also be authorised by the shareholders in a general meeting. Additionally, the company's articles of association must permit the issuance of bonus shares. For listed companies, SEBI (LODR) Regulations prescribe additional compliance requirements.
Does a bonus issue affect the share price?
Yes. On the ex-bonus date, the stock exchange adjusts the share price proportionally. For example, in a 1:1 bonus issue, a shareholder holding 100 shares at Rs. 200 each will hold 200 shares at approximately Rs. 100 each. The total value remains the same, but the lower per-share price may improve liquidity and attract a broader investor base.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.