What is meant by the Issue of shares at a Premium?

Usually, a company’s capital is made up of shares that are used to earn more capital for the company. Shares are issued to the public by public companies. Shares are issued through a process called initial public offering or IPO.

Companies may offer shares at face value or par value. However, companies may also offer shares at a value more than the face value. This process of issue of shares at a higher value than the face value is known as the issue of shares at a premium.

Premium is the difference between the price of shares and the face value or nominal value of the shares. Shares at a premium are usually issued by companies that have an excellent reputation in the market and very strong financial strength.

The extra money companies earn by the issue of shares at the premium is called capital profit. Capital profit is usually stored in a separate account of the company known as a securities premium account.

It must be noted that companies may call the premium money without any warning at any time. However, the standard rule to collect the premium is to collect it during the application process of share distribution or at the time of allotment of shares. Premium is hardly collected with call money and mostly during the allotment of shares.

Securities Premium Account

It is a standard practice for companies to issue shares at a nominal or at par value. However, in some special cases, shares may be issued at a premium value. The premium is an extra amount of money that increases the value of shares. Thus, by distributing shares at a premium, the company earns more capital than what it would collect generally. This additional money is kept in a separate account known as the securities premium account of companies. The item is shown under the heading ‘Reserve and Surplus’ on the liabilities side of the balance sheet.

Provisions Related to Security Premiums

There are some restrictions attached by law on how the securities premium can be utilized by the companies. There are some provisions in Section 52 of Companies Act, 2013 which are:

• It can be utilized by issuing fully paid bonus shares to the shareholders.
• It can be written off in the preliminary expenses of the company.
• It can be used by paying the premium payable for the redemption of any redeemable preference shares or debentures.
• Securities premiums can also be utilized by writing off the expenses incurred during the issue of shares and debentures. The expenses include discounts allowed or commissions paid for issuing the shares.
• The money can be used to buy back its own shares.

 

Key takeaways of the Issue of Shares at a Premium

• The issue of shares at a premium means the issue of shares at a higher price than the face value of the share. In other words, the premium is the amount that is over and above the face value of a share.
• Financially strong, well-managed companies that have a good reputation in the market issue their shares at a premium. For example, when a company issues a share of nominal or face value of ₹100 at ₹110, it issues the shares at a 10% premium.
• A company may ask for the amount of premium from the applicants or shareholders at any stage of issuance, i.e. at the time of application, allotment, or calls. However, companies generally call the amount of Premium at the time of allotment.
• The company needs to credit the Premium amount in a separate account called Securities Premium A/c. As the premium is not a part of the Share Capital. It is actually a gain for the company.
• As per the Companies Act, 2013 the company has to show the credit balance of the Securities Premium A/c under the heading ‘Reserves and Surplus’ on the liabilities side of the Balance Sheet.

Conclusion

As the issue of shares at a premium brings additional funds to the companies, almost all companies issuing shares would look for it. However, only financially powerful and well-managed companies get the opportunity to sell their shares at a premium.

Therefore, it may be suggested that companies should improve their base and strengthen their financial foundations so that they can issue their shares at a premium.

FAQs

Q1. What is meant by the issue of shares at a premium?

Ans. The issue of shares at a premium means the issue of shares at a higher price than the face value of the share. In other words, the premium is the amount that is over and above the face value of a share.

Q2. When can a company ask for a premium from the shareholders?

Ans. A company may ask for the amount of premium from the applicants or shareholders at any stage of issuance, i.e., at the time of application, allotment, or calls. However, companies generally call the amount of Premium at the time of allotment.

Q3. According to law, where should the premium for the issue of shares at a premium be shown on the balance sheet?

Ans. As per the Companies Act, 2013 the company has to show the credit balance of the Securities Premium A/c under the heading ‘Reserves and Surplus’ on the liabilities side of the Balance Sheet.