Skip to content

CS Executive · Company Law and Practice · Distribution of Profits

Kaveri Pharma Ltd revalued its land and created a revaluation reserve of ₹5 crore. It also holds ₹2 crore of free reserves. The Board proposes to issue bonus shares of ₹7 crore by capitalising both. What is the legal position?

The proposal is not permitted to the extent of the revaluation reserve. The proviso to section 63(1) bars bonus issues by capitalising reserves created by revaluation of assets. Only eligible sources such as the free reserves of ₹2 crore could be used, and member approval cannot override this.

  1. APermitted, as both are reserves of the company
  2. BPermitted only if the revaluation reserve is first transferred to the securities premium account
  3. CNot permitted, as reserves created by revaluation of assets cannot be capitalised for bonus sharesCorrect
  4. DPermitted if members approve by ordinary resolution in general meeting

Explanation

The proviso to section 63(1) says no bonus issue shall be made by capitalising reserves created by revaluation of assets. Hence the ₹5 crore revaluation reserve cannot be used. At most the ₹2 crore of free reserves could be capitalised. Member approval cannot override the statutory bar.

Did you get it right without looking?

One question tells you little. A timed set on Distribution of Profits shows your real accuracy, how long you take and where you lose marks.

Practise Distribution of ProfitsFree diagnostic mock

More Distribution of Profits questions