This article is written by Calista Chettiar, a Second-Year BA. LL.B. (Hons.) student from NMIMS, School of Law, Bangalore.
INTRODUCTION:
In India, the Companies Act of 2013 is the primary piece of legislation regulating how companies are operated. It outlines the protocols for establishing an enterprise, operating it, and overseeing its finances, among several other elements. The premium issue of shares along with the utilization of premiums received on the premium issue of shares is an essential component of the procedure. The provisions pertaining to the utilization of premiums generated on the issue of shares are addressed in Section 52 of the Companies Act, 2013.
OVERVIEW OF SECTION 52 OF THE COMPANY ACT OF 2013:
- Except as given in this section, the Act’s provisions regarding the decrease of a company’s share capital shall be subject to the situation in which the business issues shares at a premium, whether it’s in the form of cash or otherwise as if the equities premium account has been the company’s paid-up share capital.
- Despite subsection (1), the company can utilize the equities premium account in any of the ways listed in subsection (2):
(a) to be used in canceling the company’s start-up costs; or
(b) for the purpose of eliminating the company’s start-up expenses; or
(c) in the calculation of the value of the premium that must be paid upon the atonement of any convertible preference debentures or shares of the corporation,
(d) in figuring out the value of the premium that must be paid upon the redemption of any shares or debentures of the company, or
(e) in accordance with subsection 68(a) for the purpose of acquiring its own shares or other securities.
- Notwithstanding subsections (1) and (2), the Securities Premium Account may be employed by the prescribed class of companies whose financial statements comply with the accounting standards prescribed for the prescribed class under subsection 133.
(a) in the form of fully paid bonus shares of the business’s equity that will be issued to members of the company; or
(b) by deducting the costs of, or commission paid for, or discount allowed on, any issue of the company’s equity shares; or
(c) in accordance with subsection 68(c), to acquire its own shares or other securities.
THE PREMIUM ON SHARES:
When the issue price of a share is greater than its nominal or face value, the distinction is referred to as a premium. For example, if a company issues a share with a face value of Rs. 10 at a price of Rs. 15, the premium on the share is Rs. 5. Premium on shares is the additional consideration that investors pay over and above the face value of the shares to invest in the company.
The importance of issuing shares at a premium resides in the fact that it enables a company to boost its capitalization without diminishing its equity stake. The premiums obtained on the issuance of shares can be put toward the financing of the company’s development and growth initiatives, such as the acquisition of fresh assets, the funding of R&D, and the increase in production capacity. The notion that investors are willing to shell out extra money to invest in a firm that has issued shares at a premium can be a windfall to the company’s financial standing and reputation.
It is essential to keep in mind that the issuance of shares at a premium is governed by regulations and that the premiums acquired on the sale of shares are only eligible for the objectives set out in Section 52 of the Companies Act, 2013. In addition, the corporation must follow specific reporting and disclosure standards designed to keep the use of such premiums open and accountable to the public.
USES OF THE PREMIUM ON SHARES:
In the case of shares, a premium is an amount obtained in exchange for a share that is above and beyond the share’s par value. By issuing shares at a price over their nominal or face value, a firm creates a capital reserve. The share premium is put to use in a number of ways by the company:
- The corporation has the option of issuing fully paid bonus shares to owners from the share premium account. Shareholders are rewarded with bonus shares, and the stock market’s overall liquidity is boosted as a result.
- The initial costs associated with forming the company might be deducted from the premium on shares. Promotional costs, registration fees, legal fees, etc., could fall under this category.
- The premium on shares may also be used to offset the cost of issuing new stock or repaying a debt incurred in connection with a debt offering. Underwriting fees, brokerage fees, printing costs, advertising costs, etc. could all fall under this category.
- Premium payable on the redemption of preference shares or debentures may be funded by the premium on shares. When the corporation redeems preference shares or debentures, the premium is distributed to the holders of those instruments.
- Any premium due upon the redemption of the Company’s shares or debentures may be funded through the premium on shares. When these securities are redeemed by the corporation, the company will pay the holders of those securities this premium.
- In accordance with the rules of the Companies Act of 2013, the firm may use the premium on shares to purchase its own shares. Shares may be repurchased for several reasons, including to boost the value of the remaining shares or to forestall a hostile takeover attempt.
- Finally, the premium on shares can be invested in the company’s goals or utilized to fund the company’s plans. The capital is useful for the company’s future growth, as well as for new investments and purchases of assets.
RESTRICTIONS ON THE USE OF PREMIUMS RECEIVED ON THE ISSUE OF SHARES:
The utilization of premiums collected from the sale of shares is stipulated under Section 52 of the Companies Act, 2013. Despite its favorable stance toward premium share issuance, the Act places limitations on how the premiums raised can be spent by the issuing company. The premium received upon the issuance of shares is subject to the following restrictions:
- Cannot be used for the distribution of dividends: The premium earned on the issuance of shares is ineligible for dividend distribution to the company’s shareholders. According to Section 52 of the Companies Act of 2013, the firm is restricted to using the premiums only for the reasons listed therein.
- Cannot be used for writing off any loss incurred by the company: The premiums obtained on the issuance of shares may not be applied to or used in satisfaction of any liability, claim, expense, or obligation of the Company. Because of this, the premiums cannot be utilized to compensate for losses that have already occurred.
Because of this, the premiums cannot be utilized to compensate for losses that have already occurred. The premiums obtained through the issuance of shares are subject to certain limitations to guarantee that they are utilized solely for the purposes set forth in Section 52 of the Companies Act, 2013. This guarantees the corporation is using the premiums for the benefit of the company and its shareholders and helps preserve transparency and accountability in the use of funds. Corporations that violate these limitations may be held liable for damages.
In summation, premiums collected on the issue of shares are subject to the conditions set forth in Section 52 of the Companies Act, 2013. Companies can strengthen their financial footing and public image by raising extra capital through the issuance of shares at a premium. In accordance with Section 52 of the Companies Act, 2013, however, the use of premiums obtained on the issue of shares is subject to regulatory guidelines. As an added caveat, the corporation is not allowed to pay dividends out of such premiums or deduct losses against them. Failure to comply with the provisions of Section 52 can result in legal and financial consequences for corporations that issue shares at a premium. Premiums received on the issue of shares must be applied and used in accordance with the provisions of Section 52 of the Companies Act, 2013 to ensure openness and accountability in the handling of these funds.
REFERENCES:
https://www.geeksforgeeks.org/issue-of-shares-at-premium-accounting-entries/
https://www.indiafilings.com/learn/securities-premium/