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CS Executive · Company Law and Practice · Distribution of Profits

Nilgiri Tea Ltd declares that it will issue fully paid bonus shares to members instead of paying the dividend for the year. Which provision does this plan contravene?

The plan contravenes the rule that bonus shares shall not be issued in lieu of dividend. Section 63(3) clearly prohibits this, so Nilgiri Tea may issue bonus shares only if the other conditions are met, but not as a substitute for the dividend.

  1. ABonus shares shall not be issued in lieu of dividendCorrect
  2. BBonus shares must be issued only from securities premium
  3. CBonus shares can be issued only to preference shareholders
  4. DBonus shares require approval of the Tribunal

Explanation

Section 63(3) states that bonus shares shall not be issued in lieu of dividend. The Act does not restrict bonus shares to securities premium or to preference holders, and no Tribunal approval is mentioned in the section.

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