Companies Act Section 378ZJ

Companies Act, Section 378ZJ: Issuance of Bonus Shares by Producer Companies

Under the framework of the Companies Act, 2013, as applicable to Producer Companies, provisions have been incorporated not only to ensure efficient governance and financial discipline, but also to enable equitable distribution of accumulated earnings and reserves among Members. One such provision is encapsulated in Section 378ZJ, which deals with the issuance of bonus shares by Producer Companies.

Bonus shares, also referred to as capitalisation shares, represent a way of rewarding Members by converting a part of the Company’s accumulated profits or reserves into additional equity shares. This approach does not involve any cash payout, but instead allows Members to receive additional shares in proportion to their existing shareholding, thereby increasing their stake in the Company.

Section 378ZJ lays down a clear legal procedure and conditions for such issuance, ensuring transparency, fairness, and accountability in the process.

I. Authority and Decision-Making Process for Issuing Bonus Shares

The power to issue bonus shares is not exercised unilaterally by the management or any individual authority within a Producer Company. Instead, the law mandates that two essential approvals must be obtained before bonus shares can be issued:

(1) Recommendation by the Board of Directors

The Board of Directors of the Producer Company must first formally recommend the issuance of bonus shares. This involves a thorough evaluation by the Board of the Company’s financial standing, availability of sufficient funds in the general reserves, the impact on the Company’s capital structure, and the best interests of the Members. The Board may consider issuing bonus shares as a method to:

Capitalise undistributed profits, strengthen Member loyalty and participation align the shareholding structure with the Company’s growth, and promote equitable distribution of value to Members based on their existing ownership.
This recommendation must be recorded through a Board resolution, adopted at a duly convened meeting of the Board.

(2) Approval by the General Body of Members through a Resolution

After the Board makes its recommendation, the final authority to approve the issuance of bonus shares lies with the general body of Members of the Producer Company. A resolution must be passed at a general meeting of the Company, authorising the issuance of bonus shares in accordance with the terms proposed by the Board.

This democratic approach ensures that Members who are both the owners and primary stakeholders of the Company have a say in decisions that directly impact their ownership interests. It also reinforces the principles of transparency, collective governance, and mutual benefit that underpin the structure of Producer Companies.

II. Source of Funds for Issuance- Capitalisation of General Reserves

The issuance of bonus shares under Section 378ZJ is required to be funded through the capitalisation of amounts standing to the credit of the general reserves of the Company. These general reserves, as provided under Section 378Z-I, are accumulated from the Company’s surplus earnings, retained profits, or other legitimate sources of income. These reserves are maintained annually as a statutory requirement to support long-term financial sustainability.

Instead of distributing the reserves in cash, the Producer Company has the option to convert a portion of those reserves into share capital by issuing bonus shares. This capitalisation process enables the Company to:

Reinforce its equity base, maintain a strong balance sheet, avoid depletion of liquidity, and still reward Members for their continued support and participation.
The Company cannot use borrowed funds or external sources to issue bonus shares; only internal funds, particularly those in general reserves, are permitted for this purpose.

III. Basis of Allocation- Proportion to Existing Shareholding

The issuance of bonus shares must strictly follow the principle of proportionality, meaning that each Member receives bonus shares in proportion to the number of shares already held by them as of the specified date of issue.

For example, if a Member owns 100 shares and the Company announces a 1:1 bonus issue, that Member will receive an additional 100 bonus shares. This method ensures equitable treatment of all Members and maintains the relative ownership structure within the Company.

By allocating bonus shares proportionately, the Company:

Avoids any dilution or unfair advantage, preserves each Member’s voting and financial rights, and maintains alignment between shareholding and patronage.
This proportional approach upholds the cooperative nature of Producer Companies, where fairness and parity among Members are foundational principles.

IV. Legal and Financial Significance of Issuing Bonus Shares

Issuing bonus shares is a strategic financial decision and carries several implications for both the Producer Company and its Members:

For the Producer Company:

It reflects financial stability and confidence in future earnings.

It strengthens the equity capital without affecting cash reserves.
It improves capital adequacy and net worth.
It may lead to greater Member engagement and trust.
For the Members:

It increases the total number of shares held without any investment.
It enhances the value of their shareholding proportionately.
It signals the Company’s commitment to sharing value with its Member-owners.
It boosts their participation in governance due to the increased share count.
However, bonus shares do not result in any immediate cash benefit or income, nor do they change the total value of a Member's holdings in the short term. Instead, they reflect an internal redistribution of the Company’s equity to reward continued patronage and support.