Corporate and Other Laws · Declaration and Payment of Dividend

Bonus Shares and Penalties for Default in Dividend Payment

Updated 4 October 2026 · Fact-checked

Under section 127, if a declared dividend is not paid or the warrant not posted within 30 days, the company owes 18% simple interest and a knowing director faces up to 2 years' jail and a fine of at least ₹1,000 per day. Under section 63, bonus shares are issued fully paid, out of free reserves, securities premium or CRR, subject to conditions.

Understand Bonus Shares and Penalties for Default

A dividend is a company's declared share of profit paid to shareholders. Once the company declares it, it becomes a debt owed to the shareholder. Section 127 punishes a company that declares a dividend and then does not pay it on time.

The time limit is 30 days from the date of declaration. The dividend must be paid, or the warrant must be posted, to every shareholder entitled to it within this period. Missing the deadline has two results. The company must pay simple interest at 18% per annum for the period of default. Every director who is knowingly a party to the default is punishable with imprisonment up to two years and a fine of not less than ₹1,000 for every day the default continues.

Note the exact words. The punishment falls on directors who knew and took part in the default. It does not fall on every director automatically. The interest, however, is the company's liability.

Section 127 also lists cases where no offence is deemed committed: (a) the dividend could not be paid because of the operation of any law; (b) the shareholder gave payment directions that could not be complied with and this was communicated to him; (c) there is a dispute about the right to receive the dividend; (d) the dividend was lawfully adjusted against a sum the shareholder owes the company; (e) for any other reason, the failure was not due to any default on the part of the company.

Bonus shares are a different way of rewarding shareholders. The company does not pay cash. It capitalises its reserves and issues fully paid-up shares to members. Section 63 allows this out of free reserves, the securities premium account or the capital redemption reserve account. It bars capitalising reserves created by revaluation of assets. Bonus shares cannot be issued in lieu of dividend. Section 123(5) also confirms that capitalising profits or reserves to issue fully paid bonus shares is not barred by the rule that dividend must be paid in cash.

Key rules to remember

Time limit for paying dividend (section 127): Pay dividend or post warrant within 30 days from the date of declaration; Applies to every shareholder entitled to the dividend.
Interest on default (section 127): Interest = Unpaid dividend × 18% × (days of default ÷ 365); It is simple interest, payable by the company for the period the default continues. The days ÷ 365 form is a working method for calculation questions.
Punishment of directors (section 127): Imprisonment up to 2 years AND fine not less than ₹1,000 per day of default; Only a director who is knowingly a party to the default is liable.
Exceptions to the offence (section 127 proviso): No offence if: law prevents payment | directions cannot be complied with and this was communicated | dispute on right | lawful adjustment against dues | failure not due to company's default; Five cases, (a) to (e). Match the facts to the right clause.
Sources of bonus shares (section 63(1)): Free reserves | Securities premium account | Capital redemption reserve account; Reserves created by revaluation of assets cannot be capitalised.
Conditions for bonus issue (section 63(2)): Authorised by articles + Board recommendation and general meeting authorisation + no default on deposit/debt interest or principal + no default on employees' statutory dues + partly paid shares made fully paid + prescribed conditions complied; All conditions must be met.
Bonus in lieu of dividend (section 63(3)): Bonus shares shall not be issued in lieu of dividend; Bonus shares are not a substitute for a declared dividend.
Deposit of dividend (section 123(4)): Deposit dividend in a separate account in a scheduled bank within 5 days from declaration; Related rule that works alongside the 30-day limit.

How to solve Bonus Shares and Penalties for Default questions

Use the same method for any case study or descriptive question on dividend default or bonus shares. Write in provision, facts, conclusion format.

1Identify what is asked: dividend default (section 127) or bonus issue (section 63), or both.
2For dividend default, note the date of declaration and the date of payment or posting. Count the days. More than 30 days means a default.
3Check whether any of the five exceptions (a) to (e) fits the facts, such as a dispute on the right to receive or a lawful adjustment against dues.
4If default stands, state the consequences: 18% simple interest on the company, and imprisonment up to 2 years plus a fine of at least ₹1,000 per day on directors knowingly party to the default.
5For bonus shares, test each source: free reserves, securities premium, CRR. Reject revaluation reserve.
6Tick every condition of section 63(2): articles, Board recommendation with general meeting authorisation, no defaults on deposits, debt securities or employee dues, partly paid shares made fully paid, prescribed conditions.
7Check that the bonus is not issued in lieu of dividend and that the shares are fully paid.
8Write a clear conclusion that answers the exact question asked.

Quickest way: Quick MCQ and written answer routine

When to use it: Use this when you have 1 to 2 minutes for an MCQ or about 5 minutes for a short written answer.

Memorise the numbers: 30 days, 18%, 2 years, ₹1,000 per day, 5 days for the bank deposit.
In an MCQ, eliminate options that say fixed jail only, fine only, or interest at another rate. The law gives imprisonment and fine together, plus interest on the company.
Look for the word knowingly. If the facts show a director who did not know, the director punishment fails.
For bonus questions, scan the source of funds first. Revaluation reserve is an instant no.
For a written answer, use three lines: provision (section and rule), facts (apply dates and amounts), conclusion (liable or not, and what follows). Step marks come from naming the section and applying it.

Common mistakes in Bonus Shares and Penalties for Default

Saying every director is jailed for non-payment of dividend.
Students remember the penalty but skip the condition.
Fix: Write that only a director who is knowingly a party to the default is punishable.
Counting the 30 days from the date of the AGM resolution being communicated or from the book closure date.
Confusion between declaration, record date and payment date.
Fix: Count 30 days from the date of declaration, as the section states.
Stating the interest as compound or at a rate other than 18%.
Mixing it up with interest rules in other chapters.
Fix: Section 127 gives simple interest at 18% per annum, payable by the company for the period of default.
Allowing bonus shares out of revaluation reserve.
Revaluation reserve looks like any other reserve.
Fix: Section 63 proviso bars capitalising reserves created by revaluation of assets. Use free reserves, securities premium or CRR only.
Forgetting that the company must not be in default on deposits, debt securities or employee dues before issuing bonus shares.
Students remember only the articles and general meeting conditions.
Fix: Learn all six conditions of section 63(2) as a checklist.
Treating bonus shares as a replacement for dividend.
Both reward shareholders, so they seem interchangeable.
Fix: Section 63(3) says bonus shares shall not be issued in lieu of dividend.

Worked examples

Example 1

Alpha Ltd declared a dividend of ₹10,00,000 at its annual general meeting on 1 September. It posted dividend warrants to all shareholders only on 20 October. No exception applies. Explain the consequences under the Companies Act, 2013.

Show the solution

Provision: under section 127, a declared dividend must be paid or the warrant posted within 30 days from the date of declaration.
Facts: declaration on 1 September. Thirty days end on 1 October. Warrants were posted on 20 October, which is after the limit, so there is a default.
No exception in clauses (a) to (e) of the proviso applies, so an offence is committed.
Consequence for the company: simple interest at 18% per annum for the period of default.
Consequence for directors: every director who is knowingly a party to the default is punishable with imprisonment up to two years and a fine of not less than ₹1,000 for every day of default.

Answer: Alpha Ltd has defaulted under section 127. The company must pay 18% simple interest for the default period. Directors knowingly party to the default face imprisonment up to 2 years and a fine of at least ₹1,000 per day.

Example 2

Beta Ltd wants to issue bonus shares. Its balance sheet shows free reserves of ₹4,00,000, securities premium of ₹2,00,000 and a revaluation reserve of ₹3,00,000. Its articles authorise bonus issues and the general meeting has authorised it on the Board's recommendation. It has no defaults on deposits, debt securities or employee dues, and has no partly paid shares. What is the maximum amount it can capitalise?

Show the solution

Provision: section 63(1) permits bonus shares out of free reserves, securities premium account or capital redemption reserve. The proviso bars capitalising reserves created by revaluation of assets.
Facts: free reserves ₹4,00,000 and securities premium ₹2,00,000 are eligible. Revaluation reserve of ₹3,00,000 is not.
Conditions in section 63(2): articles authorise, Board recommendation and general meeting authorisation obtained, no defaults, no partly paid shares. All are met.
Maximum capitalisation = ₹4,00,000 + ₹2,00,000 = ₹6,00,000.
The shares must be fully paid-up and not issued in lieu of dividend.

Answer: Beta Ltd can capitalise at most ₹6,00,000 to issue fully paid bonus shares. The ₹3,00,000 revaluation reserve cannot be used.

Exam tips

Write the section number with every rule. Section 127 for dividend default and section 63 for bonus shares earn clear step marks.
In case studies, check dates first. A one-day difference around the 30-day limit often decides the answer.
Always test the exceptions in section 127 before declaring an offence. Examiners add facts like a dispute or a lawful adjustment to see if you notice.
For bonus questions, list the sources and conditions as a checklist and tick them off against the facts.
In MCQs with a calculation, convert days to a fraction of 365 and apply 18% simple interest carefully.

Practice questions from Declaration and Payment of Dividend

Bonus Shares and Penalties for Default in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Bonus Shares and Penalties for Default: frequently asked questions

What is the penalty for non-payment of dividend under section 127?

The company must pay simple interest at 18% per annum for the period of default. Every director who is knowingly a party to the default is punishable with imprisonment up to two years and a fine of at least ₹1,000 for every day of default.

Within how many days must dividend be paid after declaration?

Within 30 days from the date of declaration, the dividend must be paid or the warrant posted to the shareholder entitled to it. Separately, section 123(4) requires the amount to be deposited in a separate scheduled bank account within 5 days of declaration.

Out of which reserves can bonus shares be issued?

Section 63 allows bonus shares out of free reserves, the securities premium account or the capital redemption reserve account. Reserves created by revaluation of assets cannot be capitalised.

Can a company issue bonus shares instead of paying a dividend?

No. Section 63(3) says bonus shares shall not be issued in lieu of dividend. A bonus issue is a capitalisation of reserves, not a payment of dividend.

When is no offence committed for non-payment of dividend?

No offence is deemed committed in five cases: law prevents payment, a shareholder's directions cannot be complied with and this was communicated, there is a dispute on the right to receive, the dividend was lawfully adjusted against dues from the shareholder, or the failure was not due to any default of the company.