Chapter IV - Share Capital and Debentures
Section 63
Section 63: issue of bonus shares
A company may issue fully paid-up bonus shares to its members out of free reserves, the securities premium account or the capital redemption reserve account, but not by capitalising revaluation reserves.
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This article is for general information. Refer to the Companies Act, 2013 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(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.
Introduction
Section 63 lists the reserves that can fund a bonus issue and six conditions that must all be met before profits or reserves are capitalised. Bonus shares cannot be issued in lieu of dividend.
Key takeaways
Permitted sources
Free reserves, securities premium account and capital redemption reserve account. Revaluation reserves cannot be capitalised.
Six conditions
Articles authority, general meeting approval on Board recommendation, no default on fixed deposits or debt securities, no default on employee statutory dues, partly paid shares made fully paid, and prescribed conditions.
Not a dividend substitute
Section 63(3) prohibits issuing bonus shares in lieu of dividend.
Confirm the funding reserve
Identify the reserve to be capitalised: free reserves, securities premium account or capital redemption reserve account under section 63(1). The proviso bars capitalising reserves created by revaluation of assets.
Test each condition in section 63(2)
Before capitalising, confirm that (a) the articles authorise it; (b) the general meeting has authorised it on the Board’s recommendation; (c) there is no default in payment of interest or principal on fixed deposits or debt securities issued by the company; (d) there is no default in payment of statutory dues of employees, such as contribution to provident fund, gratuity and bonus; (e) partly paid-up shares outstanding on the allotment date are made fully paid-up; and (f) any prescribed conditions are complied with.
Prescribed condition on withdrawal
Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014, as originally notified, provides that a company which has announced its Board’s decision recommending a bonus issue shall not subsequently withdraw it. Confirm the current text of rule 14 before the Board announcement.
Amendments and commencement
Section 63 has not been amended since enactment. It came into force on 1 April 2014 under S.O. 902(E).
Practical preparation
Check the articles; confirm the reserve balance and that it is not a revaluation reserve; obtain confirmations on deposit, debt-security and employee-dues defaults; make outstanding partly paid shares fully paid; obtain the Board recommendation and general meeting approval; check authorised capital and any section 61 increase; allot and file the returns required by the Act and rules.
Practical checklist
Do
- Document the no-default confirmations under clauses (c) and (d) at the date of the decision.
- Check that authorised capital can absorb the bonus shares.
Avoid
- Do not capitalise a revaluation reserve.
- Do not issue bonus shares in place of a dividend.
- Do not announce a Board recommendation you may wish to withdraw.
Illustrative example
Hypothetical: bonus issue from securities premium
A company with a large securities premium balance and partly paid shares outstanding plans a bonus issue.
Reserve
Securities premium is a permitted source under section 63(1)(ii).
Partly paid
Calls are made so the outstanding partly paid shares are fully paid before allotment.
Approve
The Board recommends and the general meeting authorises the capitalisation.
Outcome
- With all six conditions met, the company can allot fully paid bonus shares.
Glossary
- Bonus shares
- Fully paid-up shares issued to members by capitalising specified reserves, without fresh payment.
- Free reserves
- Reserves available for distribution as dividend, as defined in section 2(43) of the Act.
- Capital redemption reserve
- A reserve built up under sections 55 and 69 on redemption of preference shares or buy-back of shares, which the Act allows to be used for fully paid bonus shares.
Frequently asked questions
Can a company issue bonus shares out of a revaluation reserve?
No. The proviso to section 63(1) bars capitalising reserves created by revaluation of assets.
Can bonus shares be issued if PF contributions are in arrears?
Section 63(2)(d) requires that the company has not defaulted in payment of statutory dues of employees, such as provident fund, gratuity and bonus.
Who approves a bonus issue?
The general meeting, on the recommendation of the Board, in addition to authority in the articles.
Need help applying this provision to your situation?
Contact BizeneedLast updated 11 October 2026