Bonus Share Issuance Blocked by Partly Paid CCPS: What Companies Must Know Under Section 63(2)(e)
Understanding the Core Problem
When a company decides to reward its members through a bonus issue, the assumption is often that eligibility depends solely on whether the shares receiving the bonus are fully paid-up. This assumption, however, is legally incorrect and can expose companies — and their officers — to significant regulatory risk.
Consider a company whose equity shares are entirely fully paid-up, but whose Compulsorily Convertible Preference Shares (CCPS) still carry an outstanding unpaid call. The Board is ready, free reserves are available, and the Articles permit capitalisation. Yet the company cannot lawfully proceed.
The reason lies in Section 63(2)(e) of the Companies Act, 2013, which imposes a capital-structure-wide eligibility condition — not a class-specific one. Any partly paid-up shares existing anywhere on the register, regardless of whether they are participating in the bonus, must be made fully paid-up before a bonus issue can be allotted. CCPS, until the moment of their conversion into equity, remain preference shares and squarely fall within this mandate.
This article examines the statutory framework, the legal reasoning behind this position, the absence of any exemption, the compliance pathway, and the consequences of non-adherence.
Statutory Framework Governing Bonus Issues
Section 63(1) — The Enabling Provision
Section 63(1) of the Companies Act, 2013 empowers a company to issue fully paid-up bonus shares to its members. The sources from which such capitalisation can be made are:
- Free reserves standing to the credit of the company
- The securities premium account
- The capital redemption reserve account
Critically, no bonus issue can be funded out of reserves created through the revaluation of assets. This restriction is absolute and applies regardless of the company's size or type.
Section 63(2) — Cumulative Eligibility Conditions
Section 63(2) of the Companies Act, 2013 lays down a set of conditions that must all be satisfied before the company can capitalise its profits or reserves for a bonus issue. These are not alternative requirements — each one is a mandatory gate, and failure to clear even one disqualifies the company from proceeding. The conditions are:
Section 63(2)(a)— The Articles of Association must authorise the bonus issue.Section 63(2)(b)— The Board must recommend the issue, and shareholders must authorise it through an ordinary resolution.Section 63(2)(c)— The company must not be in default in the payment of interest or principal on fixed deposits or debt securities issued to the public.Section 63(2)(d)— The company must not be in default in the payment of statutory dues of employees, including contributions to provident fund, payment of gratuity, and payment of bonus.Section 63(2)(e)— All partly paid-up shares outstanding on the date of allotment must be made fully paid-up.Section 63(2)(f)— Any additional conditions prescribed by the applicable rules must be complied with.
The exact statutory text of the critical condition reads:
"…the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up."
— Section 63(2)(e), Companies Act, 2013
Section 63(3) — Anti-Substitution Rule
Section 63(3) of the Companies Act, 2013 makes it explicit that bonus shares cannot be issued in lieu of a dividend. The two are entirely distinct instruments and cannot be treated as interchangeable.
Why CCPS Are "Shares" for the Purpose of Section 63(2)(e)
The Definitional Foundation: Section 2(84)
Section 2(84) of the Companies Act, 2013 defines the term "share" in the following terms:
"share means a share in the share capital of a company and includes stock."