Guidelines For Bonus Issue

GUIDELINES FOR BONUS ISSUE

The project is presented by: Tejal Darde

Roll No. 6

Smita Gujar

Roll No. 12

Aruna Gujarathi

Roll No. 13

Kavita Jadhav

Roll No. 16

Praneela Patil

Roll No. 31

INTRODUCTION An offer of free additional shares to existing shareholders. A company may decide to distribute

further shares as an alternative to increasing the dividend payout. Also known as a "scrip issue" or "capitalization issue”. New shares are issued to shareholders in proportion to their holdings. For example, the company may give one bonus share for every five shares held. The term bonus means an extra dividend paid to shareholders in a joint stock company from surplus profits. When a company has accumulated a large fund out of profits - much beyond its needs, the directors may decide to distribute a part of it amongst the shareholders in the form of bonus. Bonus can be paid either in cash or in the form of shares. Cash bonus is paid by the company when it has large accumulated profits as well as cash to pay dividend. Many a time, a company is not in a position to pay bonus in cash in spite of sufficient profits because of unsatisfactory cash position or because of its adverse effects on the working capital of the company. In such a position, the company pays a bonus to its shareholders in the form of shares; a free share thus issued is known as a bonus share. A bonus share is a free share of stock given to current shareholders in a company, based upon the number of shares that the shareholder already

owns. While the issue of bonus shares increases the total number of shares issued and owned, it does not increase the value of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant. An issue of bonus shares is referred to as a bonus issue. Depending upon the constitutional documents of the company, only certain classes of shares may be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes. A issue of bonus shares to the present shareholders of the company. The amount of bonus shares received by the shareholders is in direct proportion to their existing shareholding in the company. For example, a one-for-five bonus will enable a shareholder to receive one bonus share for every five ordinary shares presently he/she is holding. The issue of bonus shares is effected through the capitalization of the reserve funds or retained earnings of the company. A company may decide to have bonus issues when there are sizeable accumulations in retained earnings or when a revaluation of assets creates a sizeable increase in the company's reserve funds. Hence, by issuing the bonus, the company capitalises retained earnings or reserves into shareholders' capital. Although the issuance of bonus increases the paid up capital of the company, it does not represent an increase in shareholders' funds as it is only a transfer of funds

from reserves to the share capital account. This type of issues are frequently used as a mean of attracting investors to buy the shares of a company.

ISSUE OF BONUS SHARES: A LUCRATIVE PREPOSITION

A bonus share is a free share of stock given to current shareholders in a company, based upon the number of shares that the shareholder already owns. While the issue of bonus shares increases the total number of shares issued and owned, it does not increase the value of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant. An issue of bonus shares is referred to as a bonus issue. Depending upon the constitutional documents of the company, only certain classes of shares may be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes. A bonus issue (or scrip issue) is a stock split in which a company issues new shares without charge in order to bring its issued capital in line with its employed capital (the increased capital available to the company after profits). This usually happens after a company has made profits, thus increasing its employed capital. Therefore, a bonus issue can be seen as an alternative to dividends. No new funds are raised with a bonus issue. Unlike a rights issue, a bonus issue does not risk diluting your investment. Although the earnings per share of the stock will drop in proportion to the new issue, this is compensated by the fact that you will own more shares. Therefore the value of your investment should remain the same although the price will adjust accordingly.

The whole idea behind the issue of Bonus shares is to bring the Nominal Share Capital into line with the true excess of assets over liabilities.

ISSUE OF BONUS SHARES Bonus shares are issued by converting the reserves of the company into share capital. It is nothing but capitalization of the reserves of the company. There are some conditions which need to be satisfied before issuing Bonus shares: 1) Bonus shares can be issued by a company only if the Articles of Association of the company authorizes a bonus issue. Where there is no

provision in this regard in the articles, they must be amended by passing special resolution act at the general meeting of the company. 2) It must be sanctioned by shareholders in general meeting on recommendations of BOD of company. 3) Guidelines issue by SEBI must be complied with. Care must be taken that issue of bonus shares does not lead to total share capital in excess of the authorized share capital. Otherwise, the authorized capital must be increased by amending the capital clause of the Memorandum of association. If the company has availed of any loan from the financial institutions, prior permission is to be obtained from the institutions for issue of bonus shares. If the company is listed on the stock exchange, the stock exchange must be informed of the decision of the board to issue bonus shares immediately after the board meeting. Where the bonus shares are to be issued to the non-resident members, prior consent of the Reserve Bank should be obtained. Only fully paid up bonus share can be issued. Partly paid up bonus shares cannot be issued since the shareholders become liable to pay the uncalled amount on those shares. It is important to note here that Issue of bonus shares does not entail release of company’s assets. When bonus shares are issued/credited as

fully paid up out of capitalized accumulated profits, there is distribution of capitalized accumulated profits but such distribution does not entail release of assets of the company.

ISSUE OF BONUS SHARES BY PUBLIC SECTOR UNDERTAKINGS It has come to the notice of the Government that a number of Central Government Public Sector Undertakings are carrying substantial reserves in their balance sheets against a relatively small paid up capital base. The question of the need for these enterprises to capitalize a portion of their reserves by issuing Bonus Shares to the existing shareholders has been under consideration of the Government. The issue of Bonus Shares helps in bringing about at proper balance between paid up capital and accumulated reserves, elicit good public response to equity issues of the public enterprises and helps in improving the market

image of the company. Therefore, the Government has decided that the public enterprises, which are carrying substantial reserves in comparison to their paid up capital sold issue Bonus Shares to capitalize the reserves for which the certain norms/conditions and criteria may be followed and fulfilled. There are some SEBI guidelines for Bonus issue which are contained in Chapter XV of SEBI (Disclosure & Investor Protection) Guidelines, 2000 which should be followed in deciding the correct proportion of reserves to be capitalized by issuing Bonus Shares. Private sector banks, whether listed or unlisted, can also issue bonus and rights shares without prior approval from the Reserve Bank of India. Liberalizing the norms for issue and pricing of shares by private sector banks, the RBI said that the bonus issue would be delinked from the rights issue. However, central bank approval will be required for Initial Public Offerings (IPOs) and preferential shares. These measures are seen as part of the RBI's attempt to confine itself to banking sector regulation and leave the capital market entirely to the SEBI. Under the guidelines, private sector banks have also been given the freedom to price their subsequent issues once their shares are listed on the stock exchanges. The issue price should be based on merchant bankers' recommendation, the RBI has said. It means though RBI approval is not required but pricing

should be as per SEBI guidelines. The RBI, however, clarified that banks will have to meet SEBI's requirements on issue of bonus shares. As per current regulations, private sector banks whose shares are not listed on the stock exchange are required to obtain prior approval of the RBI for issue of all types of shares such as public, preferential, rights or special allotment to employees and bonus. Banks whose shares are listed on the stock exchanges need not seek prior approval of the RBI for issue of shares except bonus shares, which was to be linked with rights or public issues by all private sector banks.

BONUS ISSUE & SEBI GUIDELINES The SEBI has issued guidelines for Bonus issue which are contained in Chapter XV of SEBI (Disclosure & Investor Protection) Guidelines, 2000. A company issuing Bonus Shares should ensure that the issue is in conformity with the guidelines for bonus issue laid down by SEBI (Disclosure & Investor Protection) Guidelines, 2000. It is a detailed guideline which talks about that the bonus issue has to be made out of free reserves; the reserves by revaluation should not be capitalized. Bonus issue should not be made in lieu of dividend.

There should be no default in respect to fixed deposits. Bonus issue should be made within 6 month from date of approval. This is not exhaustive but a lot of things are more in the guidelines regarding this. Siemens Bonus issue has been recommended by the Board in their meeting held yesterday and the ratio of the Bonus shares is 1:1 (One Bonus share for every share held by the share holders). Stock price of Siemens flared up 14% today on the Bonus issue news and the stock hit an intraday high of Rs. 2285 and is currently trading at Rs.1988 up 3.19 per cent from its previous close of Rs.1926.50 on the NSE. Bonus issue news was announced after the board meeting yesterday, where Financial Results of the company were also announced. Siemens Board has also declared a dividend of Rs.4.80 on each share for the share holders of the company."

SEBI (DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES, 2000 One of the primary role of Securities And Exchange Board of India (SEBI) is to protect the interest of investors. Towards this end, SEBI issues guidelines for disclosure & investor protection-i.e. the companies are required to disclose certain information so that investors can make informed decision. In absence of the disclosure norms, the unscrupulous companies may take the investors for granted by misrepresenting or concealing certain important information. SEBI framed its Disclosure and Investor Protection Guidelines (DIP guidelines) in 1992. Many amendments have been carried out in the same to be in line with the market dynamics and requirements. In 2000, SEBI issued “Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000” which is compilation of all circulars organised in chapter form. These

guidelines and amendments thereon are issued by SEBI under section 11 of the Securities and Exchange Board of India Act, 1992. DIP guidelines provide a comprehensive framework for issuances by the companies. Applicability of the (SEBI Guidelines): SEBI Guidelines: These Guidelines shall be applicable to: • all public issues by listed and unlisted companies, • all offers for sale and right issues by listed companies whose equity share capital is listed, except in case of rights issues where the aggregate value of securities offered does not exceed Rs.50 lakhs. In case of the rights issue where the aggregate value of the securities offered is less than Rs.50 lakhs, the company shall prepare the letter of offer in accordance with the disclosure requirements specified in these guidelines and file the same with the Board. Unless otherwise stated, all provisions in these guidelines applicable to public issues by unlisted companies shall also apply to offers for sale to the public by unlisted companies.

Way in which SEBI ensures compliance with SEBI Guidelines: The Merchant Banker are the specialized intermediaries who are required to do due diligence and ensure that all the requirements of DIP are complied with while submitting the draft offer document to SEBI. Any non compliance on their part, attract penal action from SEBI, in terms of SEBI (Merchant Bankers) Regulations. The draft offer document filed by Merchant Banker is also placed on the Web site for public comments. Officials of SEBI at various levels examine the compliance of DIP guidelines and ensure that all necessary material information is disclosed in the draft offer documents.

GUIDELINES FOR BONUS ISSUE A listed company proposing to issue bonus shares shall comply with the following: 1.No company shall pending conversion of FCDs/PCDs, issue any shares by bonus unless similar benefit is extended to the holders of such FCDs/PCDs, through reservation of shares proportion to such convertible part of FCDs/PCDs. 2.The shares so reserved may be issued at the time of conversion of such debentures on the same terms on which the bonus issues are made.

3.The bonus issue shall be made out of free reserves built out of the genuine profits or share premium collected in cash only. 4.Reserves created by revaluation of fixed assets are not capitalized. 5.The declaration of bonus issue, in lieu of dividend, is not made. 6.

The bonus issue is not made unless the party-paid shares, if any existing, are made fully paid-up.

7.The Companya.Has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption thereof and b.Has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity, bonus etc. 8.A company which announces its bonus issue after the approval of the board of directors must implement the proposal within a period of six months from the date

of such approval and shall not have the option of changing the decision. 9.

The Articles of Association of the company shall contain a provision for capitalisation of reserves, etc.

10. If

there is no such provision in the Articles the company shall pass a Resolution at its general body meeting making provisions in the Articles of Associations for capitalisation.

11. Consequent

to the issue of Bonus shares if the subscribed and paid up capital exceeds the authorized share capital, a Resolution shall be passed by the company at its general body meeting for increasing the authorized Capital.

12. A

certificate duly signed by the issuer company and counter signed by statutory auditor or by Company Secretary in practice to the effect that the provision of the above clauses have been comp with, shall be forwarded to the SEBI.

CONCLUSION The economy is booming, the markets are buoyant, and Indian companies are increasing their profitability. Consequential of all this, many companies have announced issues of bonus shares to their shareholders by capitalizing their free reserves this year. In this bullish market, shareholders have benefited tremendously, even after accounting the inevitable reduction in share prices post-bonus, since the floating stock of shares increases. The whole purpose is to capitalize profits. We can say that Bonus shares go by the modern name of “Capitalisation Share”. Fully paid bonus shares are not a gift distributed of capital under profit. No new funds are raised. Earlier there was also a lot of confusion & chaos between the two fiercely debated

concepts of taxation laws i.e. Capital & Revenue Expenditure which was finally settled after the case which come up in SC in 2006, named Commissioner of Income Tax v. General Insurance Corporation. Now it is also settled law that a bonus issue in the form of fully paid share of the company is not income for the Income Tax purpose. The undistributed profit of the company is applied and appropriated for the issue of bonus shares.

Questions 1. What are the qualifications required for setting up the business of steel? 2. What is the cost for starting the steel industries? 3. About the location for starting the business? (details) 4. What is the plant layout? (details) 5. What is manufacturing process? (details) 6. What are the products can be produced and from whom we can take the orders? (details) 7. How much is the machine required and what types of machine and what is the cost of the machine? 8. How much is the manpower required and at the first how many employees are appointed and how much is the salary given to them? 9. What is the management of the company?

10. What

is the financial aspect of the project including cost of project, fixed assets, working capital requirements and source of finance? (details) 11.What will be the total income, operating profit and net profit? (details) 12.What is the importance of project to national economy? 13.How much is the raw material required for starting the business and from where we can get the raw material? 14. From where will get the power supply, water supply and what will be the cost and how much quantity is required monthly? 15. License for setting up the business from government? (details) 16.What should be the suitable climatic condition? 17.What should be the industrial atmosphere? Project Appraisal Introduction: Appraisal exercises are basically aimed at determining the viability of the project and sometimes in reshaping the project so as to upgrade its viability. While appraising a project factors that are generally considered include technical financial, economic, social, managerial and ecological. Location also has an important bearing on the project cost and cost of production. Project appraisal calls for a multi-dimensional analysis of the project, i.e. a complete scanning of the project. Banks and Financial Institutions make a critical appraisal of the projects

which are submitted to them by the entrepreneurs for getting loans. Meaning: Project appraisal means the assessment of the project in terms of its economic, social and financial viability. It is the analysis of the costs and benefits of a proposed project with the aim of assuring a rotational allocation of funds among the alternative investment opportunities with a view of achieving certain specified goals. Project appraisal is a process of transmitting information through feasibility studies into a comprehensive form in order to enable the decision-maker undertake a comparative appraisal of various projects and decide on a particular project or projects for allocating the available scarce resources Various Aspects of Project Appraisal: (1) Economic Aspects. (2) Organizational Aspects. (3) Managerial Aspects. (4) Technical Aspects. (5) Financial Aspects. (6) Market / Commercial Aspect Project Report:

The project report is a summary of project planning. It is prepared by experts after completing the project planning. It serves as a base for feasibility studies and actual execution of project. The report deals with the different aspects of the proposed project are generally prepared by a team of experts including engineers’ technicians and financial experts. Project report contains details regarding technical, financial marketing and managerial aspects of a project. The purpose of report is to place all necessary data for consideration of exp financial institutions such as IDBI, ICICI need comprehensive project report because the lending institutions desires to study the soundness proposed project before granting a loan Contents of Project Report: (1) Name, address and other details of the sponsoring agency. (2) Brief history and summary of the propose project. (3) Technical details of the project which include details of project layout, location, manufacturing process, products, etc... (4) Cost of production and profitability. (5) Manpower requirement of the project. (6)Financial aspects of the project, which include cost of project, fixed assets, working capital requirement and sources of finance. (7) Total income, operative profit and net profit. (8) Importance regarding marketing. (9) Importance of the project to national economy, export promotion

(10) Salient features of the project which will have a bearing on successful implementation with reference to land, building, p1 and machinery, raw material, availability of labour, etc. Advantages of Project Report: (1) Project report is useful for taking Bank loans and submitting proposals for government license and permission. (2) It is useful for quick reference during the process of execution of project. (3) It is useful as a controlling device. (4) Project report is useful for modification or for improvement in proposed project during the course of feasibility study or appraisal of the project. (5) It is a base for feasibility study.