India: Selective Bonus Issue: Is It Possible?

Last Updated: 31 July 2017
Article by Vishal Achanta

This article will debate a point of company law: whether a company can do a 'selective' issue of bonus shares to just a few shareholders?

By way of a brief background: a company can issue fully paid up shares for "free" to its extant shareholders by capitalizing its profits or amounts lying in its share premium/redemption reserve account – this is called a bonus issue. Bonus issue is understood in the market as a way for a financially healthy company to distribute its profits to its shareholders, not in cash (like a buyback or a dividend) but in kind (i.e., shares). To illustrate, if A holds 100 shares in a company, B holds 50 shares in a company, and the company does a bonus issue in the ratio of 2:1, then A will receive 200 shares (taking her total to 300), and B will receive 100 (taking her total to 150).

Thus, the legal construct 'bonus issue' will have two economic effects: (1) shareholders will get a greater number of shares than their initial investment would have purchased at no additional cost, and (2) the total number of issued shares of the company will go up. Since each shareholder receives bonus shares pro rata to their shareholding, (a) none of the shareholders will get diluted, and (b) while the value of each share would go down, given that there is no dilution and no actual change in the value of the company, the aggregate value of each shareholders' stake in the company would also not change.

The question which arises is, can the company issue bonus shares in a 'selective' manner i.e., to A only, and not B? In the example of a pro rata bonus issue given above, neither A nor B is diluted. However, in a selective bonus issue, bonus shares would be issued to A only, thereby diluting B and effectively increasing the value of A's investment in the company. If possible, selective bonus issue could find application in situations where the ownership pattern has to be reset, where a valuation gap needs to be addressed, or where certain shareholders have to be compensated for a drop in the company's value (anti-dilution rights seen in PE/VC deals come to mind).

Company law practitioners seem to be divided on whether a selective bonus issue is possible. Before getting into this debate, it should be noted that the previous company law, the Companies Act, 1956 (the '1956 Act') did not have any provision that expressly dealt with bonus issue, whereas the Companies Act, 2013 (the '2013 Act') does have such a provision – but arguably, still does not adequately address the question of whether a selective bonus issue is possible or not.

Due to the vacuum in the 1956 Act, the following arguments could be made against selective bonus issue, relying on first principles of company law: (1) unless shares are of different classes, they are equal in all respects, and equal economic benefits should flow to each shareholder in line with her shareholding percentage – since a bonus issue is in essence a distribution of profits, these profits should go to all shareholders ratably, (2) the intent behind bonus issue is to capitalize profits and "bring nominal share capital into line with the true excess of assets over liabilities" (Ramaiya, 17th Ed., Part 1, p.1255), not to permit disproportionate value extraction by a few controlling shareholders, and (3) allowing unregulated selective bonus issues would quickly result in abuse of minority shareholders, which is undesirable.

My two cents worth: a selective bonus issuance is indeed possible, and this is largely due to the language now found in Section 63 of the 2013 Act, which begins: "A company may issue fully paid-up bonus shares to its members, in any manner whatsoever...". Applying the literal rule of interpretation, we can see that the provision does not prohibit selective bonus issue, but rather, contains wide permissive language which suggests it is possible. While the words "in any manner whatsoever" are a little ambiguous, I don't think there is enough ambiguity to call for the application purposive rules of interpretation which require consideration of the intent behind bonus issue or first principles of company law.

There are two other factors which support the proposition that a selective bonus issue is possible from a company law point of view: (1) the high-profile precedent of a selective bonus issue which was set when Reliance Power did a selective bonus issue in 2008 (which excluded its promoter) to protect the value of its public shareholders' investment, and (2) the fact that selective bonus issues are a permitted mechanism for listed companies to bring their shareholding pattern in line with minimum public shareholding norms.

However, the above examples of permitted selective bonus issue should be taken with a pinch of salt since both were/are geared to benefit minority/retail shareholders and hence had/have the blessings of regulators. They do not give comfort when considering whether a controlling shareholder/financial investor can get away with a selective bonus issue that dilutes the minority or other shareholders. Such selective bonus issuances will come with significant legal risk since the diluted shareholders may question the validity of the bonus issue later on as being oppressive, mala fide, or simply not possible in law.

A few further points should be noted in conclusion: (1) a selective bonus issue to foreign investors to the exclusion of Indian shareholders may be viewed negatively by the RBI for being contrary to the intent of the Foreign Exchange Management Act, 1999, and (2) companies doing a selective bonus issue must be very careful by maintaining a paper trail of consents so that there is no exposure to claims from diluted shareholders at a later point in time, and must also be scrupulous about compliance, so that there is no opportunity for the validity of the bonus issue to be questioned.

The views expressed in this article are of the author and not the firm.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions