A company issues its shares at a premium when the price at which it sells the shares is higher than their par value. This is quite common, since the par value is typically set at a minimal value, such as $0.01 per share. The amount of the premium is the difference between the par value and the selling price.
Securities premium cannot be used as working capital.
Securities premium can be used for these activities:
- Issuing fully paid up bonus shares to existing shareholders.
- Writing off expense of issue of shares and debentures, such as discount given on issue of shares.
- Writing off preliminary expenses.
- Buying back shares.
- For paying premium payable on redemption of debentures.
As per Section 52(2) of the Companies Act, 2013, Securities Premium Account may be used for the purpose mentioned therein like, issue of bonus shares, writing off preliminary expenses, buyback of shares, etc.
Share premium: Though , as per definition of ‘free reserves’ , share premium is not ‘free reserve’ because dividend cannot be declared out of share premium. However, ‘share premium’ is considered just like free reserves for many of purposes as per specific provisions.
When shareholders are supposed to pay a price higher than the face value of the shares, them shares are said to be issued at premium.
In accordance with article 3 of the Companies (Reduction of Share Capital) Order (SI 2008/1915), the reserve created on such reduction can be treated as a realised profit and, therefore, it may be distributed to shareholders or used to buy back shares.
Share Capital and Share Premium are major components of equity. The key difference between share capital and share premium is that while share capital is the equity generated through the issue of shares at face value, share premium is the value received for shares that exceed the face value.
It is possible to issue the shares at a premium by a private limited company even if it a newly formed company. However, issue of shares on discount is not possible for a newly formed company as per section 79.
According to Section 52 of the Act, securities premium can be used for the following purposes: For the issue of fully paid bonus share capital. For meeting the preliminary expenses incurred by the company. For meeting the expenses, commission or discount incurred concerning securities previously issued by the company.
When the preference shares are redeemed at premium, the premium on redemption must be utilised from the balance in the Security Premium Account. If the Security Premium Account is not available or the balance is insufficient to pay the premium on redemption, then for the balance, divisible profit is to be used.
Such type of share issue is known as issue of shares at premium. The difference between the face value/par value or nominal value of shares and the price of shares issued at premium is the premium amount.
(1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called” the share premium account”; and the provisions of this Act relating to the reduction of the share capital of a …