The issue of bonus shares refers to a good method of capitalizing huge profits or reserves with the company, However, the company may capitalize its profits or reserves by issuing fully paid shares only if the Articles of the company so permit. The shares so issued are called “Bonus Shares“.
Bonus shares are issued to existing shareholders according to the proportion of shares held by them.
The following are the causes for the issue of bonus shares:
1. The company has enough reserves, which it may not require in future.
2. There exist a big gap between the paid-up capital and the capital actually employed in the business due to huge reserves.
3. If there are excessive divisible profits with the company, the company distribute a high rate of dividend, which may attract the competitors in the business. Issue of bonus shares enables a companies to reduce the dividend rate and to regularize it on yearly basis.
Verification of bonus shares and the auditor’s duty regarding bonus shares are as follows.
1. The auditor should examine the Articles of Association to ascertain whether the articles authorize the issue of bonus shares. If Table A has been adopted the provisions contained in Regulations 96 and 97 should be carefully examined.
2. He should inspect the Minute Book of Shareholders and examine the resolution declaring the bonus. He should also examine the Director’s Minute Book to see that the resolution, authorizing the appropriation of profit for Bonus Shares issue in due proportions has been passed.
3. He should also verify if copy of resolution is filed with Registrar of Companies. He should also examine the receipt filing the fee paid.
4. The auditor should also check and verify the Share Register, Allotment Book and Reserve Account to make sure that there are proper entries in those books and that they are regular.
5. Alteration if any are effected in the Memorandum of Association and Articles of Association to increase the share capital, it should be seen that the requirements of law in this respect have been duly complied with.
6. He should vouch the entries made in connection with the issue of bonus shares.
7. He should examine the Balance Sheet of the company to note the change made by the issue of shares.