Rights Issue and Bonus Shares under the Companies Act, 2013

Rights Issue and Bonus Shares under the Companies Act, 2013

When a company wants to raise more equity capital or reward shareholders without a cash outflow, two common tools come into play — the rights issue and the bonus issue. Both are ways of issuing new shares, but they serve very different purposes and follow distinct procedures under the Companies Act, 2013.

A rights issue is an offer of further shares to existing equity shareholders in proportion to their existing shareholding, giving them the 'right of first refusal' before shares can be offered to outsiders.

•      The offer letter must specify the number of shares offered and a time limit of not less than 15 days and not more than 30 days from the date of offer, within which the offer, if not accepted, is deemed declined.

•      Unless the Articles provide otherwise, the shareholder has the right to renounce the offer in favour of another person.

•      Shareholders can also request the Board to allow renunciation of unsubscribed shares to non-shareholders or apply for additional shares.

Bonus shares are new fully-paid shares issued free of cost to existing shareholders in proportion to their holding, by capitalising the company's free reserves, securities premium account, or capital redemption reserve account.

•      Must be authorised by the Articles.

•      Requires shareholder approval in general meeting on the Board's recommendation.

•      The company must not have defaulted in payment of interest or principal on fixed deposits or debt securities, and must not have defaulted in payment of statutory dues to employees such as PF, gratuity and bonus.

•      Cannot be issued by capitalising reserves created by revaluation of assets.

•      Once announced, a bonus issue cannot be withdrawn.

•      Announcing a bonus issue and then withdrawing it, which is not permitted once announced.

•      Using revaluation reserves to fund a bonus issue, which is expressly prohibited.

•      Failing to give the minimum 15-day acceptance window for a rights issue offer.

•      Not accounting for existing convertible instrument holders' rights when calculating proportional rights issue entitlements.

Q1. Can a rights issue be made to only some shareholders and not others?

No, a rights issue must be offered to all existing equity shareholders in proportion to their paid-up share capital, ensuring equal treatment of shareholders in the same class.

Q2. Is board approval sufficient for a bonus issue, or is shareholder approval also needed?

Shareholder approval in general meeting is required, based on the recommendation of the Board, in addition to the Articles authorising a bonus issue.

Q3. Can a company issue bonus shares in lieu of dividend?

No, Section 63 specifically prohibits capitalising profits or reserves for issuing bonus shares in lieu of dividend.

Q4. Does a rights issue require a special resolution?

Generally, a rights issue can be approved by the Board itself under Section 62(1)(a) without requiring a special resolution, unlike a private placement (Section 42) or preferential allotment, which require shareholder approval by special resolution.

Q5. Do all shareholders automatically get bonus shares, including those who acquired shares just before the record date?

Yes, bonus shares are allotted to all shareholders as per the register of members on the record date fixed for the bonus issue, regardless of how recently they became shareholders, as long as they are on record by that date.

Q6. Can a company issue bonus shares and reduce capital in the same year?

There is no absolute bar, but the two are very different transactions with different objectives (issuing more shares vs returning/writing off capital) and would each need to independently satisfy their own statutory conditions.

Q7. Is shareholder approval required for a rights issue if the Board is authorised to allot shares generally?

A rights issue under Section 62(1)(a) can typically be approved by the Board itself without a special resolution, unlike private placement or preferential allotment, though the company's Articles should always be checked for any additional internal approval requirements.

Rights issues and bonus issues both work through the existing shareholder base but achieve very different objectives — one raises fresh capital, the other rewards shareholders by capitalising reserves. Companies should ensure their reserves position, dividend and statutory dues track record are clean before considering a bonus issue, given the strict eligibility conditions.