Company Accounts

Topic:-INTERNAL RECONSTRUCTION AND BONUS ISSUE

Internal Reconstruction

 Internal reconstruction refers to the internal re-organization of the financial

structure of a company.
 In internal reconstruction neither the existing company is liquidated, nor is a
new company incorporated.
 Internal reconstruction of a company is done to alter the share capital or to
reduce the share capital without going into liquidation.
Objectives of Internal reconstruction

The following are the objectives of Internal reconstruction:

 To present a true and fair view of the financial position.
 To eliminate fictitious assets
 To ascertain the real value of net assets
Conditions of Internal Reconstruction

1. Authorization by Articles of Association

2. Passing of Special Resolution
3. Permission of Tribunal
4. Payment of borrowings
5. Consent of Creditors
6. Public Notice
Methods of Internal Reconstruction
 There are two methods of internal Reconstruction
1. Alteration of Share Capital
Changing the composition of share capital of a company is termed as alteration
of share capital
The alteration of share capital involves those cases which do not require any
approval from the court.
Under Section 94 of the Companies Act, a company can,if authorized by its
Articles of Association,alter the share capital in any of the following ways-
1. Increase the share capital by issue of new share
2. Consolidate shares of smaller denomination in to shares of larger denominations
3. Sub-divide shares of larger denominations in to shares of smaller denominations
4. Conversion of fully paid up Shares into Stock
5. Cancellation of Unissued Shares
2. Reduction of Share Capital
 Reduction of share capital is the cancellation of any paid up share capital
which is lost or unrepresented by available assets.This is resorted to write off
the past accumulated losses of the company.
 The reduction of capital can only be made if it is mentioned in the Articles of
the company and a special resolution is passed to that effect.
 Reduction of capital can be carried out by a company according to the
provisions laid down in Section 100 to 105 of the Companies Act.
 Reducing the liability in respect of uncalled amount of shares.
 Paying off the unpaid capital which is in excess of the needs of the company.
1. Cancelling the paid-up capital which is already lost or not represented by the
available assets.
Procedure for Reducing Share Capital
The following procedure is to be followed for reducing share capital:
The company cannot reduce its share capital unless it is authorised by its articles
of association. However, if the articles do not permit capital reduction, they may
be altered by special resolution to enable the company to reduce its share
capital.
1. The company must pass a special resolution for reduction of capital.
2. An application must be made by the company to the court for an order
confirming reduction of share capital
3. The order of the court confirming the reduction must be produced before the
registrar and the certified copy of the order and of the minutes of reduction
should be filed with the registrar for registration.
Bonus issue

 A bonus issue is an offer given to the existing shareholders of the company to

subscribe for additional shares. Instead of increasing the dividend payout, the
companies offer to distribute additional shares to the shareholders.
 Such an offer is given when the company is short of cash, and the
shareholders expect regular income. Bonus issue does not involve cash flow in
the company. It does not increase the net assets of the company but only the
share capital.
Types of Bonus shares
There are two different types of bonus shares as follows:
1) Fully paid bonus shares
2) Partly-paid up bonus shares

3) 1. Fully paid bonus shares are those shares that are distributed at no
extra cost in the proportion of the investors holding in the company.
4) These types of bonus shares can be issued from the following sources:
1) Profit and loss account
2) Capital reserves
3) Capital redemption reserves
4) Security premium account
2. Partly-paid up Bonus shares
A partly paid share is a share in a company that is only partially paid compared to
the full issue price. It means that the investor can buy partly paid shares without
paying the total issue price.
However, the remaining amount for partly paid shares can be paid in instalments
when the company makes calls.
 So when the bonus is applied in the partly-paid shares and converted into
fully paid shares without calling out the uncalled amount through profit
capitalization, it is called partly-paid up bonus shares.
Guidelines for the Issue of bonus shares
1. The company’s Articles of Association (AoA) must have the provision for bonus
shares issue.If there is no provision the resolution for bonus shares issue must
be passed in the company’s annual general meeting.
2. Consequent to the issue of Bonus Shares if the subscribed and paid-up capital
exceeds the authorised capital, a resolution must be passed at the general
body meeting in respect of increase in the authorised capital necessary.
3. The Bonus issue is permitted to be made out of free reserves built out of the
genuine profits or share premium collected in cash only.
4. Reserves created by revaluation of fixed assets are not permitted to be
capitalised.
5. The residual reserves after the proposed capitalisation should be at least 40%
of the increased paid-up capital.
6. 30% of the average profits before tax of the company for previous three years should
yield a rate of dividend on the expanded capital base of the company at 10%.s

7. The bonus shares shall not be issued in lieu of dividend.

8. Not more than two bonus issues will be allowed to a company over a period of five
years.

9. Between two successive announcements of bonus issues by a company should be a time

lag of at least 36 months.

10. Bonus issues are not permitted unless the partly paid shares, if any, existing are made
fully paid up.

11. No bonus issue will be permitted if there is sufficient reason to believe that the
company has defaulted in respect of the payment of statutory dues of the employees such
as contribution of provident fund, gratuity, bonus etc.
12. Applications for issue of bonus shares should be made within one month of the bonus
announcement by the board of directors of the company.
Thank you