Corporate and Other Laws · Prospectus and Allotment of Securities

Preference Shares, Bonus Shares and Rights Issue (CA Intermediate Corporate Laws)

Updated 4 October 2026 · Fact-checked

Preference shares carry a preferential right to a fixed dividend and capital repayment, and under Section 55 they must be redeemable within 20 years. Bonus shares are free, fully paid shares issued from reserves under Section 63. A rights issue offers new shares to existing equity holders first under Section 62. Answer by stating the provision, the facts, then the conclusion.

Understand Preference Shares, Bonus Shares and Rights Issue

A company limited by shares has two kinds of share capital under Section 43: equity and preference. Preference share capital carries a preferential right to a dividend (a fixed amount or at a fixed rate) and to repayment of capital on winding up. Equity share capital is everything that is not preference capital.

Preference shares (Section 55). A company limited by shares cannot issue irredeemable preference shares. It may issue redeemable preference shares only if its articles authorise this. They must be redeemable within 20 years from the date of issue. For infrastructure projects, the period can exceed 20 years, subject to redemption of a prescribed percentage each year at the option of the preference shareholders.

Bonus shares (Section 63). Here the company capitalises its reserves and gives shareholders fully paid shares at no cost. Cash does not come in. The company only moves money from reserves to share capital. The permitted sources are free reserves, the securities premium account and the capital redemption reserve account. Reserves created by revaluation of assets cannot be used.

Rights issue (Section 62). When a company wants to increase its subscribed capital by issuing further shares, it must first offer them to existing equity shareholders in proportion to their paid-up capital. This protects their share of ownership. Fresh money comes in, and shareholders can accept, decline or renounce the offer in favour of someone else (unless the articles say otherwise).

The key difference: bonus shares are free and do not bring in cash, while rights shares are paid for and raise funds.

Key rules to remember

Redemption period of preference shares: Maximum period = 20 years from date of issue; Applies if the articles authorise it. Infrastructure projects (Schedule VI) can exceed 20 years under the first proviso, with a prescribed percentage redeemed annually at the shareholders' option. Irredeemable preference shares cannot be issued.
Conditions for redemption (second proviso, 'Provided further', to Section 55(2), clauses (a) and (b)): Redeem only (a) out of profits available for dividend OR out of proceeds of a fresh issue made for redemption, AND (b) only if fully paid; Partly paid shares cannot be redeemed, and redemption from any source other than distributable profits or a fresh issue is barred. Clauses (a) to (d) all sit in the second proviso. The first proviso is only about infrastructure projects.
Capital Redemption Reserve (CRR) (second proviso to Section 55(2), clause (c)): CRR transfer = nominal value of shares redeemed out of profits; If shares are redeemed out of a fresh issue, no CRR is needed. Reduction-of-capital provisions apply to CRR as if it were paid-up capital, except as the section provides.
Premium on redemption (second proviso, 'Provided further', to Section 55(2), clause (d)): Prescribed class (financial statements comply with Section 133 accounting standards): premium provided out of profits, before redemption [clause (d)(i)]. Other companies: premium provided out of profits or the securities premium account, before redemption [clause (d)(ii); Section 52(2)(d)]. Exception (the 'Provided also' proviso, which sits under clause (d)(i)): for preference shares issued on or before the commencement of the Act, even a prescribed-class company may provide the premium out of profits or the securities premium account.; The premium must be provided for before the shares are redeemed. For preference shares issued after commencement, the securities premium account is available for this purpose only to companies outside the prescribed class. The 'Provided also' proviso sits under clause (d)(i) and covers only shares issued on or before commencement.
Unredeemed preference shares (Section 55(3)): Consent of holders of three-fourths in value + Tribunal approval → issue further redeemable preference shares for the amount due including dividend; The Tribunal orders immediate redemption of shares held by non-consenting holders. This is not treated as an increase or reduction of share capital.
Sources for bonus shares (Section 63(1)): Free reserves | Securities premium account | Capital redemption reserve account; No capitalisation of revaluation reserve. Bonus shares must be fully paid and cannot be issued in lieu of dividend.
Conditions for bonus issue (Section 63(2)): Articles authorise + Board recommends and general meeting authorises + no default on fixed deposits/debt securities + no default on employee statutory dues + partly paid shares made fully paid + prescribed conditions met; All conditions must be satisfied together.
Rights offer period (Section 62(1)(a)): Offer open for at least 15 days (or such lesser number of days as may be prescribed) and not more than 30 days; If not accepted within the time, the offer is deemed declined.
Rights offer notice (Section 62(2)): Dispatch at least 3 days before the issue opens, by registered post, speed post, electronic mode, courier or any other mode with proof of delivery; Sent to all existing shareholders.
Other routes for further issue: Employees under ESOP (special resolution) | Any persons by special resolution at a price fixed by a registered valuer's report; These are alternatives to a rights offer under Section 62(1)(b) and (c).

How to solve Preference Shares, Bonus Shares and Rights Issue questions

Most questions give a company scenario and ask whether an issue or redemption is valid. Use one fixed routine and write it in provision, facts, conclusion form.

1Identify which instrument the question deals with: preference shares (Section 55), bonus shares (Section 63) or further issue and rights (Section 62).
2State the rule in plain words with its section number, using exact conditions.
3List every condition of that rule and tick each one against the facts given in the question.
4Spot the facts that break a condition: partly paid shares, no authority in articles, a default on fixed deposits, use of revaluation reserve, a period over 20 years.
5If numbers are given, compute the CRR transfer, the premium on redemption and the source used.
6Write the conclusion clearly: valid or invalid, and what the company must do to comply.
7Close with a one-line rule summary so that step marks are secured even if your conclusion differs.

Quickest way: Checklist method for MCQs and written answers

When to use it: Use it when you have under four minutes for a question, and for all 1-2 mark MCQs on this topic.

For MCQs, hunt for the trap word: irredeemable, partly paid, revaluation reserve, in lieu of dividend, 20 years, three-fourths, 15 to 30 days.
Eliminate any option that allows irredeemable preference shares or bonus from the revaluation reserve. Both are barred.
Match the source to the share: redemption comes from profits or a fresh issue, bonus comes from the three permitted reserves.
For written answers, use this layout: Provision (rule and section), Facts (tick each condition), Conclusion (one line).
Always show the CRR figure as a separate line in numerical answers. It earns its own step mark.
Remember the contrast: bonus equals no cash and fully paid, rights equals cash and a 15-30 day offer.

Common mistakes in Preference Shares, Bonus Shares and Rights Issue

Saying a company can issue irredeemable preference shares if the articles allow it.
Students recall that articles authorise redeemable shares and stretch this to all preference shares.
Fix: Remember that Section 55(1) bans irredeemable preference shares outright. Articles only authorise redeemable ones.
Allowing partly paid preference shares to be redeemed.
Students focus on the sources of redemption and forget the paid-up condition.
Fix: The second proviso ('Provided further') to Section 55(2), clause (b), requires shares to be fully paid before redemption. Check this first in every redemption question.
Transferring to CRR even when redeeming out of a fresh issue.
CRR feels mandatory in every redemption.
Fix: CRR is created only when redemption is out of profits, and the amount equals the nominal value of shares redeemed. A fresh issue needs no CRR.
Using revaluation reserve for bonus shares.
Students see it as a reserve and assume it is free to use.
Fix: Section 63(1) proviso bars capitalising reserves created by revaluation of assets. Only free reserves, the securities premium account and CRR are allowed.
Treating bonus shares as a substitute for dividend.
Both reward shareholders, so they look interchangeable.
Fix: Section 63(3) says bonus shares cannot be issued in lieu of dividend.
Stating the rights offer period as a fixed 30 days or as only 15 days.
Students remember one number from the range.
Fix: State it as not less than 15 days (or such lesser number of days as may be prescribed) and not more than 30 days, with the notice dispatched at least 3 days before the issue opens.

Worked examples

Example 1

X Ltd has ₹10,00,000 of fully paid 8% redeemable preference shares, ₹100 each. The company's articles authorise the issue of redeemable preference shares, and the shares were issued within the 20-year limit. It plans to redeem them at par. It has ₹7,00,000 of free reserves available for dividend and will make a fresh issue of equity shares for ₹4,00,000 for the purpose of redemption, and the whole ₹4,00,000 of proceeds is applied to the redemption. Calculate the CRR transfer and state whether the redemption is valid.

Show the solution

Provision: Under the second proviso ('Provided further') to Section 55(2), clauses (a) and (b), shares must be fully paid and may be redeemed only out of profits available for dividend or the proceeds of a fresh issue made for redemption. Under clause (c), profits used for redemption require a transfer to CRR equal to the nominal value redeemed.
Facts: The shares are fully paid, and the sources are profits and a fresh issue. The articles authorise redeemable shares and the shares were issued within the 20-year limit, as the question states.
Amount to redeem: ₹10,00,000. It is redeemed at par, so there is no premium on redemption.
Part funded by the fresh issue: ₹4,00,000. No CRR is needed for this part.
Part funded by profits: ₹10,00,000 − ₹4,00,000 = ₹6,00,000. This is within the ₹7,00,000 available.
CRR transfer = nominal value redeemed out of profits = ₹6,00,000.
Conclusion: The redemption is valid. The company must transfer ₹6,00,000 from profits to the Capital Redemption Reserve Account.

Answer: Redemption is valid. The CRR transfer is ₹6,00,000. The remaining ₹4,00,000 comes from the fresh issue and needs no CRR.

Example 2

Y Ltd wants to issue bonus shares. Its articles are silent on capitalisation of reserves. It has free reserves and a revaluation reserve. It has delayed paying interest on its fixed deposits. Some shares are partly paid. Advise the company.

Show the solution

Provision: Section 63 allows fully paid bonus shares out of free reserves, the securities premium account or CRR. Section 63(2) lists the conditions that must all be met.
Fact 1: The articles do not authorise capitalisation. Condition (a) is not met, so the articles must first be altered.
Fact 2: The delay in paying interest on fixed deposits is a default. Under Section 63(2)(c), the company must not have defaulted in payment of interest or principal on fixed deposits or debt securities. The condition fails until the default is cured.
Fact 3: Partly paid shares must be made fully paid before allotment under Section 63(2)(e).
Fact 4: The revaluation reserve cannot be capitalised under the proviso to Section 63(1). Only free reserves, the securities premium account or CRR may be used.
Fact 5: The Board must recommend and the general meeting must authorise the issue under Section 63(2)(b).
Conclusion: The company cannot issue bonus shares now. It must first alter its articles, clear the default, make partly paid shares fully paid, use only free reserves, the securities premium account or CRR (not the revaluation reserve), and obtain Board recommendation and general meeting approval.

Answer: Bonus shares cannot be issued at present. The company must fix the articles, the default and the partly paid shares, use only free reserves, the securities premium account or CRR (not the revaluation reserve), and obtain general meeting authorisation on the Board's recommendation.

Exam tips

Examiners test conditions. Learn the six conditions of Section 63(2) as a list and tick them against the facts.
In redemption problems, write the CRR line separately. It is a standard step-mark item.
Contrast questions (bonus versus rights) are common. Compare on source, cash inflow, who receives it and the governing section.
Use the three-part answer format: provision, facts, conclusion. Never skip the conclusion.
For MCQs, watch for options that sound right but break one condition, such as redemption of partly paid shares or bonus from revaluation reserve.

Practice questions from Prospectus and Allotment of Securities

Preference Shares, Bonus Shares and Rights Issue in other exams

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

Preference Shares, Bonus Shares and Rights Issue: frequently asked questions

Can a company issue preference shares redeemable after 20 years?

Generally no. Section 55(2) limits redemption to a period not exceeding 20 years from the date of issue. The exception is infrastructure projects (first proviso), where a longer period is allowed with annual redemption of a prescribed percentage at the option of the shareholders.

What is the difference between bonus shares and rights shares?

Bonus shares are issued free to existing members out of reserves, so no cash comes in. Rights shares are offered to existing equity holders in proportion to their holding, and they must pay for them. Bonus is governed by Section 63 and rights by Section 62.

Can premium on redemption of preference shares be paid from the securities premium account?

It depends on the company and on when the shares were issued. Under Section 55(2), second proviso ('Provided further'), clause (d)(i), a prescribed-class company (financial statements comply with the Section 133 accounting standards) must provide the premium out of profits. The exception is the 'Provided also' proviso, which sits under clause (d)(i): for preference shares issued on or before the commencement of the Act, profits or the securities premium account may be used. Other companies may use profits or the securities premium account under clause (d)(ii), and Section 52(2)(d) lists this use, but Section 52(3) does not list it for the prescribed class.

Can a shareholder transfer the right to a rights offer to someone else?

Yes, unless the articles provide otherwise. Under Section 62(1)(a)(ii), the offer is deemed to include a right to renounce the shares in favour of any other person, and the notice must state this right.