Companies issue securities at a premium when it sells them at a price above nominal value. The Companies Act, 2013, does not lay down any conditions or restrictions regulating the issue of securities by a company at a premium. However, the Companies Act, 2013 does impose conditions regulating the utilization of the securities premium amount collected by the company on securities issued.
When a company issues shares at a premium, whether for cash or otherwise, the aggregate amount of the premium received on those shares shall be transferred to a separate account called “Securities Premium Account”.
According to the provisions of Section 52(2) of the Companies Act, 2013 the securities premium can be utilised only for:
- Issuing fully paid bonus shares to members of the company.
- Writing off the balance of the preliminary expenses of the company.
- Writing off commission paid or discount allowed, or the expenses incurred on issue of shares or debentures of the company.
- Premium payable on redemption of any redeemable preference shares or debentures of the company.
- Purchase of its own shares or other securities under section 68 of the Companies Act, 2013.
The securities premium account may be applied by such class of companies, as may be prescribed by rules and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133 of the Companies Act, 2013.
- In paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares.
- In writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company.
- For the purchase of its own shares or other securities under section 68.
The securities premium cannot be treated as profit and as such the amount of premium is not available for distribution as dividend.
The amount of securities premium whether received in cash or in kind must be kept in a separate account, known as the “Securities Premium Account”.
The amount of securities premium is to be maintained with the same sanctity as the share capital.
Whenever, a company issues security at a premium, even though the consideration may be other than cash, a sum equal to the amount or value of the premium must be transferred to the securities premium account. Premium paid by a shareholder does not give him any preferential rights in case of a winding up. Securities premium amount cannot be treated as free reserves, as it is in the nature of capital reserve.