Issue of Bonus Shares to Residents and Non-Residents: Foreign Company Subsidiary Compliance in India

A. Introduction And Applicable ProvisioA. What Are the Legal Provisions and Conditions Governing the Issue of Bonus Shares in India?

Bonus shares are governed by Section 63 of the Companies Act 2013 and FEMA 1999 for non-resident shareholders. They can be issued from free reserves, securities premium account, or capital redemption reserve. The company must be authorised by its articles, obtain shareholder approval, have no defaults on statutory dues or debt obligations, and ensure all partly paid shares are fully paid up before allotment.

Bonus shares are shares issued by a company to its existing shareholders free of cost, in proportion to the number of shares already held by them. The issue of bonus shares does not involve any cash outflow from shareholders; instead, it represents capitalization of the company’s accumulated profits or reserves. Companies planning bonus issuances, especially those with foreign investors, must ensure compliance with regulations governing foreign companies’ subsidiaries in India. Bonus shares reflect the company’s strong financial position and enhance shareholder confidence without diluting ownership.

Bonus shares can be issued out of:

• Free reserves
• Securities premium account
• Capital redemption reserve

Section 63 of the Companies Act, 2013, and Companies (Share Capital and Debentures) Rules, 2014, govern the issue of bonus shares. The Foreign Exchange Management Act (FEMA), 1999, regulates the issue of shares to Non-Resident Indians (NRIs) and other non-resident individuals. Bonus shares can be issued to non-residents on a non-repatriation or repatriation basis, depending on original shareholding.

B. What Are the Conditions That Must Be Met Before a Company Can Issue Bonus Shares in India?

The company must be authorised by its articles and obtain shareholder approval in a general meeting. It must have no defaults on fixed deposit interest, principal payments, or statutory employee dues including provident fund, gratuity, and bonus. All partly paid shares must be fully paid up before allotment. Bonus shares cannot be issued in lieu of dividends, and once a bonus issue is announced it cannot be subsequently withdrawn.

As per the Companies Act, 2013, no company shall issue bonus shares unless:

(a) It is authorised by its articles.

(b) It has been authorized by the shareholders in a general meeting.

(c) it has not defaulted in the payment of interest or principal in respect of fixed deposits or debt securities, if any;

(d) It has not defaulted in the payment of statutory dues of the employees, such as contributions to the provident fund, gratuity, and bonus.

(e) Any partly paid-up shares have been made fully paid up on the date of allotment.

It is important to note:

• Bonus shares shall not be issued in lieu of a dividend.
• The company that has announced a bonus issue shall not subsequently withdraw it.

C. What Is the Process for Issuing Bonus Shares to Resident and Non-Resident Shareholders?

The process begins with a board meeting notice at least seven days prior, followed by convening a board meeting and general meeting to pass the necessary resolution. Form MGT-14 must be filed within 30 days if a special resolution is passed. Form PAS-3 is filed with ROC within 30 days of allotment. Form FC-GPR must be filed with RBI through the FIRMS portal within 30 days for non-resident shareholders. Physical share certificates must be issued within 60 days.

The process for issuing bonus shares is broadly similar for resident and non-resident shareholders; however, additional compliance is required for non-residents under foreign company subsidiary compliance in India regulations.

1. Send notice of Board Meeting at least 7 days prior, ensuring alignment with foreign company subsidiary compliance in India.
2. Convene a Board Meeting to consider the issue of bonus shares and fix the date, time, and agenda for a General Meeting, following proper corporate formalities and foreign company subsidiary compliance in India procedures.
3. Issue a notice of General Meeting to shareholders, ensuring compliance with regulatory requirements.
4. Conduct the general meeting to pass the necessary resolution, in accordance with foreign company subsidiary compliance in India.
5. File Form MGT-14 (if a special resolution is passed) within 30 days.
6. Approval from the RBI should be obtained for allotment to NRIs if outside the automatic route, following Fema Compliance for Foreign Companies in India.
7. Hold a Board Meeting to complete allotment formalities in proportion and manner as per the resolution.
8. File the return of allotment with the ROC in Form PAS-3 within 30 days.
9. FEMA reporting (Form FC-GPR) to RBI within 30 days for non-residents.
10. Obtain NSDL/CDSL approvals for demat issuance.
11. For physical shares, issue certificates within 60 days.

During this process, companies often consult an Indian Legal Consultant for Foreign Companies to ensure regulatory compliance and smooth allotment.

D. What Are the Benefits of Issuing Bonus Shares for Companies and Shareholders?

For companies, bonus shares preserve cash, improve market perception, and convert accumulated reserves into share capital without cash outflow. For shareholders, they increase shareholding without any investment, carry no immediate tax liability at allotment, and can lead to higher future dividend receipts as share count increases.

Benefits to the Company

• Preservation of cash: Bonus shares reward shareholders without a cash outflow.
• Improved market perception: More shares improve affordability and liquidity, aligning with foreign company subsidiary compliance in India.
• Conversion of reserves: Accumulated free reserves are transferred into share capital, reflecting financial strength and adherence to foreign company subsidiary compliance in India.

Benefits to Shareholders

• Increase in shareholding: Shareholders gain additional shares without investment.
• Tax efficiency: No immediate tax implications at allotment.
• Higher future returns: More shares can lead to increased dividend receipts, following foreign company subsidiary compliance in India.

E. What Are the Tax and FEMA Implications of Bonus Shares for Resident and Non-Resident Shareholders?

Bonus shares are not taxable at the time of allotment for either resident or non-resident shareholders. Capital gains tax applies only upon sale, classified as short-term or long-term depending on the holding period. Under FEMA Non-Debt Instruments Rules 2019, non-residents may receive bonus shares provided the issue complies with the Companies Act, does not breach sectoral caps, and the original shareholding was acquired under applicable rules.

At the Time of issue: bonus shares are not taxable for shareholders, whether resident or non-resident. Thus, no tax liability arises at the time of allotment. Companies issuing bonus shares must ensure compliance with the foreign company subsidiary compliance in India principles.

At the Time of Sale: The Income-tax Act, 1961, contains provisions related to taxation of bonus shares at the time of sale and determination of capital gains. Capital gains tax arises when bonus shares are sold (Short-term capital gains (STCG) or Long-term capital gains (LTCG), depending on the holding period).

F. What Does the June 2025 FEMA Amendment Mean for Bonus Share Issuances in FDI-Prohibited Sectors?

The Ministry of Finance amended FEMA Non-Debt Instruments Rules 2019 through a notification dated 11th June 2025, permitting Indian companies in FDI-prohibited sectors to issue bonus shares to existing non-resident shareholders. The issuance must follow Companies Act guidelines and the shareholding pattern must remain unchanged. RBI reporting through Form FC-GPR on the FIRMS portal within 30 days of allotment remains mandatory.

As per Rule 7, a person resident outside India and having investment in an Indian company may make an investment in equity instruments issued by such company as a bonus issue, provided that:

1. The offer made by the Indian company is in compliance with the Companies Act, 2013.
2. Such an issue shall not result in a breach of the sectoral cap applicable to the company.
3. The shareholding on the basis of which the bonus issue has been made must have been acquired and held as per the provisions of applicable rules.
4. Such investment made through a bonus issue shall be subject to the conditions as are applicable at the time of such issue.

Recent Amendment:

The Ministry of Finance has amended FEMA (Non-Debt Instruments) Rules, 2019, through a notification dated June 11, 2025. As part of this amendment, Indian companies operating in FDI-prohibited sectors may issue bonus shares to their existing non-resident shareholders, following the guidelines of the Companies Act.

RBI reporting via the FIRMS portal in Form FC-GPR within 30 days of allotment ensures proper regulatory compliance for non-resident shareholders.

Conclusion

The issuance of bonus shares benefits both resident and non-resident shareholders, as well as the company. By capitalizing reserves, the company’s cash flow remains unaffected, ensuring financial stability while rewarding shareholders. The increase in shares often reduces per-share market value, enhancing affordability and liquidity.

Shareholders gain additional shares without cash outlay, and the overall market value of holdings can increase over time. Bonus shares are not taxable at the time of issue, making them attractive across jurisdictions.

Finally, the increase in paid-up capital strengthens the company’s financial base and demonstrates growth. CorporateLegit ensures that all bonus share issuances comply with foreign company subsidiary compliance in India, reinforcing regulatory standards and shareholder confidence.

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