Project Report

On
Recent Bonus share

distribution and evaluation of

the decision

For the partial Fulfillment of the Award of the Post

Graduation
Diploma In Management

Session 2014-16

Submitted To:
By:
Dr. Nandita Mishra
Tandan(BM-014252)

Submitted
Shubham
Shubhangi

Shukla(BM-014254)
Siddharth Singh
(BM-014256)
Sneha Singh (BM014258)

INSTITUTE OF MANAGEMENT STUDIES

Somnath Gupta (BM014259)

DECLARATION
We hereby declare that the project work entitled Recent

Bonus share distribution and evaluation of the

decision

Submitted

to

the

INSTITUTE

OF

MANAGEMENT STUDIES, GHAZIABAD is a record of an

original work done by us under the guidance of Dr.
Nandita Mishra (IMS Faculty).The topic is been justified as
far as possible.

Name of the students

Shubham Tandan
Shubhangi Shukla
Siddharth Singh
Sneha Singh
Somnath Gupta
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ACKNOWLEGMENT
Efforts taken by us in this project would not have been
possible without the kind support and help of our faculty.
We would like to extend our sincere gratitude to Dr.
Nandita Mishra. We are highly indebted to (Institute of
Management Studies, Ghaziabad) for their guidance
and constant supervision as well as for providing necessary
information regarding the project and also for their support
in

completing

the

project.

We would like to express our gratitude towards our parents,

friends and other members of the institution for their kind
co-operation and encouragement which helped us in
completion of this project.

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Bonus Share
Bonus shares are additional shares given to the current
shareholders without any additional cost, based upon the
number of shares that a shareholder owns. These are
company's accumulated earnings which are not given out in the
form of dividends, but are converted into frees hares.
Description: The basic principle behind bonus shares is that
the total number of shares increases with a constant ratio of
number of shares held to the number of shares outstanding. For
instance, if Investor A holds 200 shares of a company and a
company declares 4:1 bonus, that is for every one share, he
gets 4 shares for free. That is total 800 shares for free and his
total holding will increase to 1000 shares.
Companies issue bonus shares to encourage retail participation
and increase their equity base. When price per share of a
company is high, it becomes difficult for new investors to buy
shares of that particular company. Increase in the number of
shares reduces the price per share. But the overall capital
remains the same even if bonus shares are declared.
ISSUE OF BONUS SHARES-COMPANIES ACT, 2013
There was no specific section under the Companies Act, 1956
dealing with Bonus Shares. Companies were following the
norms prescribed by the Controller of Capital issues. Once SEBI
came into existence and controller of Capital issues were
abolished, unlisted Private Limited Companies and Public
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Limited Companies were free to issue Bonus Shares if there

were sufficient reserves to match the issue of Bonus Shares. To
bring in sanctity to the Issue of Bonus Shares, The Companies
Act, 2013 has introduced Section 63 to deal exclusively with
Bonus Shares. Unlike Issue of Sweat equity Shares, MCA has not
specified any rules to comply with. Section 63 deals with five
aspects.
i.
ii.
iii.
iv.

The source out which a Company could issue Bonus

Shares,
The source out of which a Company cannot utilize for
such issue,
The Secretarial formalities to be complied with and The
Companies who are not eligible to issue Bonus Shares.
Bonus Issue once issued cannot be withdrawn

i. THE SOURCE OUT OF WHICH BONUS SHARES SHALL BE

ISSUED
The Company shall issue fully paid Bonus Shares out of any one
of the following source:
a. Free Reserves of the Company.
b. The Securities Premium Account.
c. The Capital redemption reserve Account.
ii. SOURCE OUT OF WHICH THE COMPANY SHALL NOT
UTILISE FOR THE PURPOSE OF ISSUE OF BONUS SHARES
a. The Company shall not issue Bonus Shares by capitalizing
reserve created out revaluation of Assets.
b. The Company shall not issue shares in lieu of Dividend.
iii. SECRETARIAL FORMALITIES TO BE COMPLIED WITH
In order to capitalize its profits or reserves for the purpose of
issue of Bonus Shares the Company has to comply with the
following :
a. The Articles of Association of
authorize such issue.
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the

Company

should

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b. The Board has to recommend the issue of Bonus Shares.

c. The Company in a general Meeting should authorize the
issue of Bonus Shares.
iv. COMPANY NOT ELIGIBILE IN ISSUING BONUS SHARES
A Company shall not be in a position to issue Bonus Shares if
a.
b.
c.
d.

It has defaulted in repayment of deposit.

It has defaulted deposit interest.
It has defaulted in debt securities.
It has defaulted in respect of payment of statutory dues of
the employees viz., contribution to Provident fund, Bonus,
gratuity.
e. Any outstanding partly paid shares remain unpaid

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v. BONUS
ISSUE ONCE
WITHDRAWN

ANNOUNCED

CANNOT

BE

Under Section 63(2)(f) empowers the Central Government to

stipulate fresh conditions to comply with as and when required
for the issue of Bonus Shares.
One such condition presently notified is that the Bonus Issue
once recommended by the Board and announced by the
Company, it cannot be withdrawn subsequently.
Effects of Bonus Issue:
Reserves/Retained Earnings of the company reduce.
Paid up equity share capital increases.
Total Net worth remains unchanged.
No. of outstanding shares of the company increases.
Shareholders
proportional
ownership
remains
unchanged.

EPS (Earnings per share), MPS (Market price of

share), BVPS (Book value per share) decreases.

COMPLIANCE CHECK LIST AND GENERATION OF VARIOUS

DOCUMENTS AND REGISTERS DURING PRE AND POST
ISSUE
Once the professional understands the requirements of Section
63 as stated above, he should then have the following
Compliance Check List which will enable him to prepare the
required Documents/ registers during Pre and Post Issue of
Bonus Shares
Compliance Check List
1. Source out of which the bonus issue is to be made
a. Current Profit ..Value:
b. Current ReservesValue:
c. Current Securities Premium Account.Value:
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2. Quantum of Issue:
a. No of Shares
b. Nominal Value per share:
c. Total:
3. Intended Date of Board Meeting:
a. For alteration of Articles subject to the approval of the
shareholders (if required)
b. For recommending the Issue
c. Convening of EGM
4. Intended Date of EGM for considering the alteration of Article
if required
and/or approval of the Bonus Issue:
5. Intended Date of Board meeting for the allotment of Bonus
Shares:

PRE ISSUE WORK FOR THE ISSUE OF BONUS SHARES

Once the professional prepares the compliance checklist, he
could then proceed to generate the following documents during
the pre issue of Bonus Shares
a. Draft Notice and the draft minutes of the Board Meeting for
considering the following:
i. alteration of Articles (only when required)
ii. Recommending the Bonus Issue
iii. Convening of EGM
1. for alteration of Articles which do not
capitalization of reserves (only when required)

provide

2. Approving the Bonus Issue recommended by the Board.

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b. Draft EGM Notice, explanatory Statement and the Minutes for

considering the following special business
i. For alteration of Articles (which do not provide for
capitalization
of
reserves)
ii. Approving the Bonus Issue recommended by the Board.
c. Draft Notice and the Minutes of the Board Meeting for
i. Allotment of Bonus Shares
d. Filing of Form No 7.14 with the Registrar of Companies for
registering the Special resolution (only when the Articles of
Association is amended for making provision for capitalization
of profits)
POST ISSUE OF BONUS SHARES
a. Preparation and Issue of Share Certificates in Format No.4.1.
b. Making entries in the Register of Members in Format No.7.1.
c. Making entries in the Register of Directors and Key
Management Personnel and their Shareholdings as per Section
170.
d. Filing Form No.3.3. With regard to Allotment of Bonus Shares

Advantages to Company of Issue Bonus Share

(i) Conservation of Cash. The issue shares allows the
company to declare a dividend without using up the cash that
may be used to finance the profitable investment opportunities
within the company and thus company can maintain its liquidity
position.
(ii)
Under
Financial
Difficulty
and
Contractual
Restrictions. When a company faces stringent cash difficulty
and is not in a position to distribute dividend in cash, or where
certain restrictions to pay dividend in cash are put under loan
agreement, the only way to satisfy the shareholders or to
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maintain the confidence of the shareholders is the issue of

bonus shares.
(iii) Remedy for Under-Capitalization. In the state of undercapitalization, the rate of divided is very much high. In order to
lower down the rate of dividend, the company issued bonus
shares instead of paying dividend in cash.
(iv) Widening the Share Market. If the market value of a
company's share is very high, it may not appeal to small
investors. By issuing bonus shares, the rate of dividend is
lowered down and consequently share price in the market is
also brought down to a desired range of activity and thus
trading activity would increase in the share market. Now small
investors may get an opportunity to invest their funds in low
priced shares.
(v) Economical Issue of Securities. The cost of issue of
bonus shares is the minimum because no underwriting
commission, brokerage etc. is to be paid on this type of issue.
Existing shareholders are allotted bonus shares in proportion to
their present holdings.

INSTITUTE OF MANAGEMENT STUDIES

Investors/SHAREHOLDERS get the following advantages

from bonus issue
(i)

Tax-Saving. The stock dividend is not taxable as

income in the hands of shareholders while cash
dividend is taxable as ordinary income.

(ii) Marketability of Shares. Shareholders who are in dire

need of money sell their stock dividend and pay capital gain
taxes which are usually less than the income tax on cash
dividend. Thus, by issuing bonus shares, marketability of
shares is increased.
(iii) Higher Future Profits of the Company. The payment
of stock dividend is normally interpreted by shareholders as
an indication of higher profitability. Stock dividend is
generally declared by the directors of the company only
when they expect rise in earnings to offset the additional
outstanding shares. Thus, it may convey some information
which may have a favorable impact on the value of shares.
(iv) Increased Future Dividend. In a company as been
following a policy of paying a fixed rate of dividend and
continues if after issuing bonus shares, the shareholders will
get larger amount of cash dividend in future. Moreover, it
may have a favorable affect on the value of shares.
(v) Psychological Value. The declaration of stock dividend
may have a favorable psychological effect an shareholders. It
gives an impression of prosperity of the company. It helps to
increase the capital value of shares in the market.

impact of Bonus Issue on the Market Price of Equity

Shares
We have discussed the advantages of bonus issue from the
point of view of the company and the shareholders n the
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above lines. Now, we shall discuss its impact on the market

priced of the equity shares.
The main advantage of bonus issue to the shareholders is that
they get more cash dividend in future years if company
maintains the pre-bonus rate dividend on equity shares. But the
question is whether the company will be in position to maintain
the rate of dividend after issuing bonus shares or mere
capitalizing the accumulated profits it depends solely on the
earnings capacity of the

company. The future rate of dividend will naturally be lower as

because the number of equity shares will be increased without
any increase in its earning capacity of thus the total profits
would be divisible among the larger number of shares thus
lowering down the dividend per share. Dividend at the lower
rate would adversely affect the share price in the market. But if
the total cash-dividend to be received by a shareholder after
bonus issue, is protected or it marginally increases, share price
would not be affected much. On the other hand, if the issue of
bonus shares is used as a speculative tool by the administrator
or persons having vested interest in the company in order to
earn higher profits for themselves, the share price in the
market would invariably limits and should be detrimental to the
interest of shareholders. On the country, if the company
maintains the rte of dividend, the shares including bonus
shares would be quoted at a much higher price which in turn
would affect favorably the psychology of the investors and
goodwill of the company in the eyes of investing public.

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ANALYSIS AND INTERPRETATION ON ISSUE OF BONUS:

COMPANY

BONU
S
RATIO

DATE
ANNOUNCEMENT RECORD

ADI FINCHEM

1:10

19-05-2104

JBM AUTO

1:1

14-08-2014

NITIN FIRE
PROT
SIMPLEX
TRADING AND
AGENCIES

1:3

30-09-2014

9:1

11-11-2014

10-072014
09-102014
15-112014
26-122014

EX-BONUS

09-072014
08-102014
13-112014
24-122014

1. ADI FINCHEM
ADI Finechem Ltd. is a specialty oleo chemical manufacturing company
situated near the city of Ahmadabad in the western region of India. Our
fine chemical products portfolio has applications in manufacturing of
resins for Paints, Inks adhesives etc.

Status after announcement of bonus shares:

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Interpretation:
The announcement of bonus share in the adi finechem on 19-05-2014 with the
ratio of 1:10, on the date the opening price was 135.71, closing as well as high
was 139.49. thereafter the graph shows ups and down in the price of the share in
the market.

Status after Record and Ex-bonus date:

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Interpretation:
After the execution on the bonus share there was a huge fall in the price of the
companys share. At the opening of the share price was 231.9,high 232.3 and
close @ 218.1.Thereafter simultaneously increase and decrease in the price of
the share at a certain period of time.

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2. JBM AUTO
JBM Auto is engaged in the manufacture of sheet metal components,
assemblies, sub- assemblies, tools, dies and moulds. The company
operates through three main divisions namely Sheet Metal Division, Tool
Room Division and special purpose vehicle (SPV).

Status after announcement of bonus shares:

Interpretation:
The announcement of bonus share in the adi finechem on 14-08-2014 with the
ratio of 1:1, on the date the opening price was 103.78, closing as well as high
was 108.53. Thereafter the graph shows grown simultaneously in the price of
the share in the market.

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Status after Record and Ex-bonus date:

Interpretation:
After the execution on the bonus share there was a huge fall in the price of the
companys share. At the opening of the share price was 257.85, close and high
@ same price 257.85.Thereafter drastically decrease in the price of the share at
a certain period of time.

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3. NITIN FIRE PROTECTION:

Status after announcement of bonus shares:

Interpretation:
The announcement of bonus share in the NITIN FIRE PROT on 30-09-2014
with the ratio of 1:3, on the date the opening price was 51.71, closing as well as
high was 257.85. Thereafter the graph shows decreasing at the decreasing rate
in the price of the share and increase at a point of time in the market.

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Status after Record and Ex-bonus date:

Interpretation:
After the execution on the bonus share there was a huge fall in the price of the
companys share. At the opening of the share price was 43.65,high at 44.2 and
close @ 42.15.Thereafter simultaneously fall in the price of the share which is
shown in the graph in that scenario.

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4. SIMPLEX TRADING AND AGENCIES:

The company has grown to be a leading source for quality packaged
brands of food items, disposable food service products, hygiene solutions
and packaging supplies. We are known island-wide and supply
supermarkets, hotels, restaurants, food vendors and many other business
sectors.

Status after announcement of bonus shares:

Interpretation:
The announcement of bonus share in the SIMPLEX TRADING AND
AGENCIES on 11-11-2014 with the ratio of 9:1, on the date the opening price
was 61.29, closing as well as high was 61.29. Thereafter the graph shows
growing rate in the price of the share and increase at a point of time in the
market.

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Status after Record and Ex-bonus date:

Interpretation:
After the execution on the bonus share there was a huge fall in the price of the
companys share. At the opening of the share price was 80.6,high and close at
same price 80.6 .Thereafter fall in the price of the share which is shown in the
graph in that scenario for liquidity of the company.

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Conclusion
TWO ISSUES THAT NEED CLARIFICATION
The Following are the two contentious issues in Section 63
which needs attention of the Central Government
i. A Company cannot issue Bonus Shares if it has defaulted in
repayment of deposits, interest on deposits, debt securities,
and statutory dues like, PF, gratuity and Bonus. There is no
definition for the word default in the Companies Act, 2013. For
instance, if a Company fails to pay PF in a particular month and
subsequently pays in the next month, a default is committed.
Whether such a Company can or cannot issue Bonus Shares?
The words such as defaulting or Continuing Default are not
used in the Section. What does the MCA want to convey? I do
not think that there is a possibility of any 100% Non defaulting
Companies to be in existence since Incorporation till its
dissolution. Even a single day delay in payment of the above
dues is a default. What mechanism we have to monitor such an
event of default?
ii. Once the Board recommends, the Bonus issue cannot be
withdrawn even if the members decide so. That means no
revocation of the recommendations made by the Board of
Directors is possible. In other words you are forcing the
shareholders to accept the recommendation of the Board. So it
is only a formality to seek approval of the Shareholders. Let us
assume that the Bonus Issue is recommended by the Board and
is rejected or not passed by the members in the EGM, the
company still has to go ahead with the Issue of Bonus Shares
by virtue of Section 63(2)(f).
I leave the above two questions to be pondered over by
the readers.

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