SEBI guidelines on bonus issue of a company are as follows:
1. No bonus shares shall dilute other issues:
Issue of bonus shares shall not be made pending conversion of fully convertible debentures or partly convertible debentures unless sufficient number of shares is reserved for allotment to the holders of the said FCDs or PCDs after conversion.
2. Bonus issue from free reserves:
Bonus shares can be issued only out of free reserves built out of genuine revenue profits or share premium collected in cash.
3. Revaluation reserve not eligible:
Reserve created by revaluation of assets cannot be capitalized for issue of bonus shares.
4. Issue in lieu of dividend:
Bonus issue shall not be made in lieu of dividend.
5. Partly paid shares not eligible:
Partly paid shares, if any, will not be eligible for bonus shares. Such partly paid shares, if any, must be made fully paid before a bonus issue is contemplated.
6. No default of payment of interest, etc.:
The issuing company shall not have defaulted in the payment of interest or principal in respect of fixed deposits and interest payment on dentures or repayment of principal on redemption of debentures. The company must be certain that it has not defaulted in respect of payment of statutory dues of the employees, such as contribution of provident fund, gratuity, bonus, etc.
7. Time within which bonus issue shall be made:
A company which announces a bonus issue after the approval of its Board of Directors must implement the proposal within a period of six months from the date of such approval.
8. Bonus proposal cannot be withdrawn:
A company which has announced its proposal to issue bonus shares, cannot have the option to change its decision.
9. Provision in the articles:
There must be a suitable provision in the Articles of Association of the company for capitalisation of reserves. If not, the company must pass a special resolution and incorporate a suitable provision in the Articles of Association, before initiating action for a bonus issue.
10. Increase in authorized capital:
Where necessary, before action on a bonus issue is taken, the company shall increase its authorised capital so as to permit the proposed bonus issue.
11. Prohibition of issue of bonus shares by revaluation of assets:
The Department of Company Affairs has vide Circular No. 9/94 dated 6-9-1994, informed all companies (listed as well as unlisted) that no company shall venture to issue bonus shares out of reserves created by revaluation of fixed assets.