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Bonus Shares Nepal procedures are frequently questioned by listed companies and investors seeking to understand capital reserve utilization. Are you uncertain about how bonus shares are issued, what legal requirements apply, or how the new SEBON tax liability rules affect the process? Understanding Bonus Shares Nepal requirements is essential because this mechanism allows companies to reward shareholders without cash outflow while signaling financial strength and improving market liquidity.
The Bonus Shares Nepal framework is established under Section 179 of the Companies Act, 2063 and regulated by the Securities Board of Nepal (SEBON). This mechanism involves capitalizing retained earnings or reserves to issue additional shares to existing shareholders free of cost. Consequently, shareholders receive extra shares proportionate to their holdings without any payment, while companies conserve cash for operational needs.
Furthermore, recent SEBON amendments have fundamentally changed tax liability procedures, making companies responsible for dividend tax on bonus shares. Additionally, the 10th Amendment to Securities Issuance and Allotment Guidelines, 2082, has streamlined regulatory compliance. This comprehensive tutorial is presented to clarify every aspect of Bonus Shares Nepal procedures.
What Are Bonus Shares Nepal Under Current Law?
Bonus Shares Nepal refers to additional shares issued to existing shareholders by capitalizing savings earned from profits or reserve funds. Governed by Section 179 of the Companies Act, 2063, this process converts retained earnings or reserves into share capital, increasing the total number of shares outstanding without changing shareholders' proportional ownership.
Moreover, Bonus Shares Nepal serves multiple strategic purposes. Companies utilize this mechanism to reward loyal shareholders, improve stock liquidity by increasing floating shares, meet regulatory capital requirements (particularly for banks and insurers), and signal financial health to the market. As a result, bonus issues are often viewed positively by investors as indicators of sustainable profitability.
In addition, the definition under the Companies Act explicitly includes "the increase of the paid up value of a share by capitalizing the saving or reserve fund." Therefore, bonus shares may be issued either as additional shares or through increasing the face value of existing shares, though the former is standard practice in Nepal.
Key Legal Framework for Bonus Shares
| Legislation | Key Provisions | Enforcing Authority |
|---|---|---|
| Companies Act, 2063 | Section 179: Bonus share issuance by special resolution | OCR |
| Companies Act, 2063 | Section 2(q): Definition of bonus shares | Legal definition |
| Securities Act, 2063 | Disclosure and allotment regulations | SEBON |
| SEBON Guidelines 10th Amendment, 2082 | Tax liability on dividend for bonus shares | SEBON |
| Income Tax Act, 2058 | Capital gains tax on sale of bonus shares | IRD |
Sources for Bonus Shares Nepal Capitalization
Companies may capitalize various reserves to issue bonus shares. Therefore, understanding eligible sources is essential:
Primary Sources
- Retained Earnings: Accumulated distributable profits from previous years
- General Reserves: Appropriated profits set aside for general purposes
- Share Premium Account: Excess over face value from previous share issuances
- Capital Redemption Reserve: Created from buy-back of shares
- Revaluation Reserve: From upward revaluation of fixed assets (subject to conditions)
Restrictions on Sources
- Prohibition: Capital reserves from government grants or asset donations cannot be used
- Conditions: Revaluation reserves require realization through asset sale
- Verification: Sufficient audited reserves must exist to cover bonus issue
Reserve Utilization Hierarchy
| Reserve Type | Utilization Priority | Conditions |
|---|---|---|
| Retained Earnings | Primary source | Must be distributable profits |
| General Reserve | Secondary source | Not earmarked for specific purpose |
| Share Premium | Tertiary source | As per Section 58 utilization rules |
| Capital Redemption Reserve | Specialized use | Created from buy-back proceeds |
| Revaluation Reserve | Conditional use | Requires asset realization |
Step-by-Step Bonus Shares Nepal Process
The bonus share process is structured sequentially. Therefore, following these steps ensures compliance with Bonus Shares Nepal requirements:
Step 1: Reserve Verification and Board Evaluation
The board of directors verifies:
- Available Reserves: Audited retained earnings and eligible reserves
- Issue Ratio: Proposed ratio (e.g., 1:1, 1:2, 10:1) based on reserve availability
- Capital Requirements: Post-issue paid-up capital implications
- Regulatory Compliance: SEBON and NRB requirements for sector-specific companies
Step 2: Board Resolution and Recommendation
The board passes a resolution recommending the bonus issue to shareholders. The resolution specifies:
- Ratio of bonus shares to existing holdings
- Source of capitalization (specific reserves)
- Record date determination methodology
- Timeline for shareholder approval and implementation
Step 3: Shareholder Approval Through Special Resolution
Section 179 mandates special resolution (75% majority) at General Meeting:
- Notice Period: Minimum 21 days for AGM or EGM
- Disclosure: Detailed explanation of reserve utilization and impact
- Voting: Proportional voting based on shareholding
- Documentation: Minutes recording resolution passage
Step 4: SEBON Notification and Compliance
Listed companies must notify SEBON and ensure:
- Disclosure: Public announcement of bonus issue details
- Record Date: Determination of cut-off date for eligibility
- Tax Compliance: Arrangement for dividend tax payment (new requirement)
- Allotment Timeline: Schedule for credit to DEMAT accounts
Step 5: Record Date and Book Closure
The company determines:
- Record Date: Date on which shareholders must be registered to receive bonus shares
- Book Closure Period: Typically 3-5 days before record date for administrative processing
- Eligibility Verification: Finalization of shareholder register
Step 6: Capitalization and Allotment
- Reserve Transfer: Eligible reserves transferred to share capital account
- Share Credit: Bonus shares credited to shareholders' DEMAT accounts
- Ratio Application: Proportionate allotment based on holdings on record date
- Fractional Handling: Cash payment for fractional entitlements or rounding down
Step 7: Post-Issue Compliance
- OCR Filing: Return of allotment within prescribed timeline
- SEBON Reporting: Compliance confirmation and disclosure updates
- Listing: New shares listed on NEPSE for trading
- Tax Payment: Company payment of dividend tax on bonus shares (as per 10th Amendment)
Recent SEBON Tax Liability Changes (2025)
The 10th Amendment to Securities Issuance and Allotment Guidelines, 2082, has fundamentally altered tax obligations:
Previous Practice
- Shareholder Liability: Beneficiaries were responsible for clearing tax dues themselves
- Transfer Delays: Companies delayed bonus share transfers citing unpaid taxes
- Compliance Issues: Inconsistent tax collection and reporting
New Requirement (Effective November 2025)
- Company Liability: Listed companies must arrange for dividend tax adjustment and payment directly from the dividend/bonus issue itself
- Direct Payment: Companies pay tax on behalf of shareholders
- Streamlined Process: Eliminates delays and ensures compliance
- Responsibility Shift: "All organized institutions registered with the Board must arrange for the dividend tax applicable on bonus shares distributed to their shareholders to be adjusted and paid directly by the respective institutions from the dividend itself"
Tax Rate Implications
| Tax Type | Rate | Applicability |
|---|---|---|
| Dividend Tax (Bonus Shares) | 5% | Withheld at source by company |
| Capital Gains Tax (Short-term) | 7.5% | On sale within 365 days |
| Capital Gains Tax (Long-term) | 5% | On sale after 365 days |
Documentation Requirements for Bonus Shares Nepal
Proper documentation ensures regulatory compliance. Therefore, the following documents are required:
| Document | Purpose | Prepared By |
|---|---|---|
| Board Resolution | Corporate approval for bonus issue | Company Secretary |
| Special Resolution | Shareholder authorization | General Meeting |
| Reserve Verification Report | Confirmation of available reserves | Statutory Auditor |
| SEBON Notification | Regulatory disclosure | Company |
| Record Date Announcement | Public notice of eligibility cut-off | Company/NEPSE |
| Allotment Basis | Methodology for share distribution | Share Registrar |
| DEMAT Credit Confirmation | Electronic share credit evidence | CDS & Clearing |
| Tax Payment Proof | Compliance with new SEBON requirement | Company/IRD |
Benefits and Strategic Advantages of Bonus Shares Nepal
Companies and shareholders derive multiple benefits from bonus issues:
For Companies
- Cash Conservation: Rewards shareholders without cash outflow
- Capital Structure Optimization: Converts reserves to permanent capital
- Regulatory Compliance: Meets NRB capital requirements for BFIs
- Market Signaling: Demonstrates profitability and financial health
- Liquidity Enhancement: Increases shares outstanding, improving marketability
For Shareholders
- Increased Holdings: More shares without additional investment
- Wealth Accumulation: Potential capital appreciation on additional shares
- Tax Deferral: No immediate tax liability (tax applies only on sale)
- Ownership Maintenance: Proportional stake preserved
- Future Dividend Potential: Larger base for future cash dividends
Comparison: Bonus Shares vs. Rights Issue vs. Cash Dividend
Understanding distinctions helps companies select optimal distribution methods:
| Feature | Bonus Shares | Rights Issue | Cash Dividend |
|---|---|---|---|
| Shareholder Payment | None (free) | Discounted price | None (cash received) |
| Company Cash Flow | No impact | Inflow (capital raised) | Outflow (cash paid) |
| Reserve Utilization | Capitalization of reserves | Fresh capital injection | Profit distribution |
| Shareholder Approval | Special resolution | Ordinary/special resolution | Ordinary resolution |
| Ownership Dilution | None (proportional) | None if subscribed | None |
| Tax Treatment | 5% dividend tax (company paid) | No tax on issue | 5% withholding tax |
| Market Impact | Price adjustment downward | Price may decline | Price typically drops |
| Regulatory Complexity | Moderate | High (SEBON approval) | Low |
Frequently Asked Questions About Bonus Shares Nepal
What is the difference between bonus shares and stock split?
Bonus shares increase share capital by capitalizing reserves, while stock splits divide existing shares into smaller units without changing capital. Both increase share quantity but differ in accounting treatment and reserve impact.
Can private companies issue bonus shares?
Yes. Any company incorporated under the Companies Act, 2063 may issue bonus shares by special resolution, provided sufficient distributable reserves exist. Private companies follow the same Section 179 procedures but without SEBON listing requirements.
What happens to share price after bonus issue?
The share price theoretically adjusts downward proportionally. For example, a 1:1 bonus (100% issue) would halve the share price, maintaining the same market capitalization but with doubled shares outstanding.
Are bonus shares taxable in Nepal?
Bonus shares themselves are not taxable at issuance. However, SEBON now requires companies to pay 5% dividend tax on bonus issues. When shareholders subsequently sell bonus shares, capital gains tax applies (5% for long-term, 7.5% for short-term holdings).
Can bonus shares be issued if company has losses?
No. Sufficient distributable profits or eligible reserves must exist. Companies with accumulated losses cannot capitalize reserves for bonus issues until profitability is restored and losses are offset.
How long does the bonus issue process take?
From board decision to listing, the process typically takes 2-4 months. SEBON compliance (for listed companies), shareholder meeting scheduling, and DEMAT processing contribute to the timeline.
What is the maximum bonus ratio permitted?
No statutory maximum exists, but practical constraints apply. Excessive ratios may dilute earnings per share significantly and attract regulatory scrutiny. Ratios typically range from 10% to 100% (1:10 to 1:1).
Can shareholders refuse bonus shares?
No. Bonus shares are automatically credited to eligible shareholders' accounts. Unlike rights issues, no subscription or payment is required. Shareholders may subsequently sell the shares if they do not wish to hold them.
Do bonus shares carry voting rights?
Yes. Bonus shares rank pari passu with existing shares, carrying identical voting rights, dividend entitlements, and other privileges from the date of allotment.
What records must companies maintain for bonus issues?
Companies must preserve: board and shareholder resolutions, reserve verification reports, allotment registers, SEBON correspondence, tax payment records, and updated share registers for minimum statutory periods.
Conclusion: Executing Bonus Shares Nepal Successfully
Bonus Shares Nepal offers companies an efficient mechanism for shareholder rewards and capital structure optimization. Therefore, meticulous attention to reserve availability, regulatory compliance, and the new SEBON tax liability requirements ensures successful issuance.
Consequently, engagement of qualified company secretaries, statutory auditors, and legal professionals is recommended for complex bonus issues, particularly for listed companies navigating SEBON requirements. The recent regulatory changes enhancing company tax responsibility demonstrate SEBON's commitment to streamlined compliance.
For professional assistance with Bonus Shares Nepal, Attorney Nepal provides comprehensive corporate advisory services. Their team of capital markets specialists handles board resolutions, SEBON notifications, compliance management, and regulatory liaison to ensure seamless bonus share execution.
Contact Attorney Nepal today to execute your bonus issue with regulatory precision and strategic advantage.