In Nepal, bonus shares are an important aspect of corporate finance. They are issued by companies to their existing shareholders, typically from the company’s accumulated profits, as a means of rewarding shareholders without distributing cash. Bonus shares help increase a company’s equity base while allowing shareholders to increase their holdings in the company without incurring additional costs.
This article will provide a detailed explanation of bonus shares, their legal framework under the Companies Act, 2063 (2006), and their implications for companies and shareholders in Nepal.
What are Bonus Shares?
Bonus shares are additional shares issued to shareholders at no charge, typically in proportion to the number of shares they already own.
For example, a company may issue one bonus share for every five shares held. This is often seen as a way to distribute a company’s profits or reserves to shareholders in the form of equity rather than cash.
Bonus shares differ from regular share issues because they do not require shareholders to pay any additional amount.
They are instead funded by a company’s retained earnings or reserves.
Legal Framework for Bonus Shares under the Companies Act, 2063
The Companies Act, 2063, governs the issuance of bonus shares in Nepal, setting out the legal process, requirements, and limitations for their issuance.
Here are the key provisions under the Act that companies must adhere to when issuing bonus shares:
Bonus Shares (Section 179)
Bonus shares are an important mechanism for rewarding shareholders in Nepal.
According to Section 179 of the Companies Act, 2063, a company can issue bonus shares only if it has sufficient accumulated profits or reserves to fund the issuance.
The process of issuing bonus shares involves several legal steps to ensure compliance and shareholder protection.
Shareholder Approval (Section 55)
Bonus shares cannot be issued without the approval of the shareholders.
The Board of Directors must propose the issuance of bonus shares, which must then be approved at the Annual General Meeting (AGM) or an Extraordinary General Meeting (EGM).
According to Section 55, the resolution passed at the meeting must be approved by a simple majority of the shareholders present.
Conditions for Issuance of Bonus Shares
- No Cash Payment Required - Bonus shares are issued from the company's retained earnings or capital reserves, and shareholders are not required to make any cash payments. The value of the bonus shares is typically derived from the company’s accumulated profits, and not from the company’s capital.
- Proportional Distribution - The issuance of bonus shares is typically done in proportion to the number of shares already held by shareholders. For example, a company may issue one new share for every five shares held.
- No Reduction in Share Capital - The issuance of bonus shares does not affect the company’s overall capital structure. The company's total value remains the same; instead of receiving cash dividends, shareholders receive additional equity.
Filing with the Office of the Company Registrar (OCR)
Once the shareholders approve the bonus shares, the company must file a resolution with the Office of the Company Registrar (OCR) for registration.
The company must submit the following documents:
- Shareholders passed the special resolution.
- The amended memorandum of association and articles of association (if necessary).
- Proof of the company’s sufficient reserves to fund the bonus share issuance.
The OCR will review the application, and if everything is in order, the company will be registered with the newly issued bonus shares.
Impact on Share Capital and Ownership
Issuing bonus shares does not change the company’s overall value but dilutes the ownership percentage of existing shareholders.
Although shareholders receive additional shares, their ownership percentage in the company remains the same unless the shares are sold or transferred.
For example, suppose a shareholder holds 10% of the company’s shares before the issuance of bonus shares.
In that case, they will still retain 10% ownership after the bonus shares are issued, but their shareholding will increase.
Accounting Treatment
According to the Companies Act, bonus shares are considered a transfer from the company’s reserves (e.g., retained earnings) to its share capital in company.
The amount transferred to share capital should be reflected in the company’s financial statements.
The accounting treatment involves debiting the reserves account and crediting the share capital account to reflect the issuance of new shares.
Tax Implications of Bonus Shares in Nepal
The taxation of bonus shares in Nepal is an important consideration for both companies and shareholders. According to the Income Tax Act, bonus shares are not taxable at the time of issuance since no cash transaction takes place.
However, when the shareholder sells the bonus shares, capital gains tax applies. The tax rate on capital gains from the sale of shares is typically 15% for shares held for more than a year and 20% for shares held for less than a year.
This means shareholders will incur tax liability only when they sell their bonus shares, not when they receive them.
Benefits of Issuing Bonus Shares
- Increase in Shareholder Value – Bonus shares increase the number of shares held by shareholders, providing them with a larger stake in the company. Even though their ownership percentage remains the same, the increase in shares often signals healthy growth.
- No Cash Outflow – Unlike cash dividends, issuing bonus shares does not require a company to distribute cash, preserving its liquidity while rewarding shareholders.
- Market Perception – Issuing bonus shares can be viewed positively by the market, signalling that the company is doing well financially and has substantial reserves.
- Facilitates Market Liquidity – Bonus shares increase the number of shares in circulation, which can enhance market liquidity, especially for smaller companies.
Challenges and Considerations
- Dilution of Ownership - Although the ownership percentage remains the same, the overall value per share may be diluted when more shares are issued. This can affect shareholders' influence on the company.
- Impact on Earnings Per Share (EPS) - Since bonus shares increase the total number of shares outstanding, the earnings per share (EPS) may decrease, which could affect the company's financial ratios and stock price.
- Shareholder Expectations - Regular issuance of bonus shares may lead shareholders to expect them as a form of reward, which might not always be feasible or sustainable for the company.
- Legal Compliance - Companies must adhere to the legal requirements and ensure that they have sufficient reserves before issuing bonus shares. Failure to comply with the Companies Act and regulations can result in penalties.
Conclusion
Bonus shares are a fashionable way for companies in Nepal to reward shareholders without distributing cash.
Under the Companies Act, 2063, the process for issuing bonus shares is clearly defined, requiring shareholder approval, sufficient reserves, and compliance with regulatory requirements.
While bonus shares offer several benefits, including retaining cash within the company and enhancing shareholder value, they also pose challenges, such as diluting ownership and potentially affecting the company’s financial ratios.
Understanding the legal framework and tax implications is crucial for both companies and shareholders involved in issuing bonus shares in Nepal.
