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Bonus shares are issued by changing the reserves of the company into share capital, it is nothing but capitalization of the reserves of the company. 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 proviso in this regard in the articles, they must be amended by passing special resolution act at the general meeting of the company. Care must be taken that issue of bonus shares does not lead to entire share capital in excess of the authorized share capital. Otherwise, the authorized capital must be improved by amending the capital clause of the Memorandum of association. If the company has availed of any loan from the financial institutions, previous permission is to 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 directly after the board meeting. Where the bonus shares are to be issued to the non-resident members, previous consent of the Reserve Bank should be obtained.
Only totally paid up bonus share can be issued. Partially paid up bonus shares cannot be issued since the shareholders become liable to pay the uncalled amount on those shares.