Securities Premium: Section 52 of the Companies Act, 2013

Securities Premium happens when a company issues its shares for more than their face value. This means a surplus amount for a company. It is captured as a capital reserve. The company keeps the extra money collected in a separate account. This separate account is called the Securities Premium Account. As per Section 52 of the Companies Act 2013, it issues bonus shares. It also writes off preliminary expenses, or funding buybacks. So, this account represents a reserve for the company. In this blog, you will get guidance on Securities Premium.

What is the Securities Premium?

Securities Premium refers to the extra amount. A company gets this amount over the nominal or face value of its shares. We consider this amount as the capital reserve. It needs to be credited to a separate account. This account is known as the "Securities Premium Account." Section 52 of the Companies Act, 2013 states it. The balance sheet will also show this amount under "Reserves and Surplus." In other words, we can say it is a restricted reserve. As the company cannot distribute it as dividends.  This is useful for

a) Issuing Bonus Shares

b) Writing off preliminary expenses

c) Buying Back shares, etc

What is the Securities Premium Account?

The Securities Premium Account refers to a unique and non-distributable capital reserve. It appears on the balance sheet of a company. It shows the extra amount a company gets. They get it when they sell shares at a price higher than their nominal (face) value. Section 52 of the Companies Act, 2013, handles it. The company lists it under "Reserves and Surplus" in the equity part of the balance sheet.

Permissible Uses of Securities Premium under the Companies Act, 2013

Listed below are the permissible uses:

a) Issuing Bonus Shares

Companies have the right to issue fully paid bonus shares to existing shareholders.

b) Writing Off Expenses

This means the costs of forming a company or issuing shares. It also means the debentures. The company adjusts the bonds from the extra money made from selling those shares.

c) Adjusting Commission/Discount on Securities

It focuses on commissions paid, discounts allowed, or expenses incurred on the issue of shares or debentures. This means if the company sell shares for less than their value, they can balance the loss.  The extra money made from selling other shares at a higher price can offset this loss.

d) Premium Payable on Redemption

The company requires it for the premium payable on the redemption of redeemable preference shares or debentures.

e) Buy-Back of Shares

This applies when the company repurchases its own shares. The company follows legal rules under Section 68.

Restrictions on Using Securities Premium

Below are the key restrictions:

a) No Dividends

The company cannot use Securities Premium to give dividends to shareholders. This means the organisation cannot use the funds to cover operational expenses. The company also cannot use it for expenses related to business growth.

b) No General Business Expenses

It is not applicable for day-to-day operational costs or general business expansion.

c) Limited Utilisation

The company can only use this for the specific purposes authorised by Section 52(2) and 52(3). They restrict any usage beyond these specified areas.

d) Capital Reduction Rules

If the company uses the account for non-statutory purposes, it must follow the strict procedures. The procedures are for a reduction of share capital.

Legal Framework of the Securities Premium

The legal framework for securities premiums in India mainly comes from Section 52 of the Companies Act, 2013. This section states that the premium is a type of capital receipt that can only be used in certain ways. Company cannot use the premium for non-distributable purposes. In case of the listed companies, the SEBI Regulations support these rules. The regulations are specifically the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR). This was an updated change to some rules about capital raising and rights issues.

Accounting Treatment Under the Companies Act, 2013

Section 52 of the Companies Act, 2013, mainly governs it. It is considered a capital receipt and not as revenue profit. This means the company will not be able to distribute it as dividends.

Key Benefits of Securities Premium

Here are the key benefits:

a) Issuing Fully Paid Bonus Shares

Companies will utilize it to give bonus shares to existing members. It helps company to grow without using cash.

b) Writing Off Preliminary Expenses

Companies can use it to reduce costs that arise before or during incorporation.

c) Writing Off Issue Expenses/Commission

This consists of costs, commissions, or discounts for any issue of shares or bonds.

d) Premium on Redemption

The extra charges give money for the premium payable upon redemption of preference shares or debentures.

e) Buy-back of Shares

A company can use it to pay for buying back its own shares. This follows Section 68 of the Companies Act.

f) Strengthens Financial Position

It acts like a capital reserve. This helps to improve the balance sheet. It also shows that the market value is high and investors trust the company.

Conclusion

Securities Premium is governed under Section 52 of the Companies Act, 2013. It is an essential capital reserve. This signifies high investor trust and strong corporate valuation. It helps companies raise money effectively, but it cannot be used like regular profit. Company can only use this for specific things. The things can include issuing bonus shares, writing off preliminary expenses, funding buy-backs, etc. These generally keep the company financially stable. If you need any kind of assistance with it, get in touch with Online Legal India.

FAQ

Q1. What is Securities Premium?

Securities Premium refers to the extra amount a company gets over and above the face value of its shares. This occurs when the company is issuing the shares.

Q2. Is Securities Premium considered revenue or operational income?

No, it is not considered as revenue or operational income. It is mainly recognised as a capital receipt. This is not a part of the profit & loss statement.

Q3. Where does it appear in the Balance Sheet?

It is listed on the liabilities side under "Shareholders' Funds" and "Reserves and Surplus."

Q4. Can Securities Premium be used to pay dividends?

No, it cannot be used to pay dividends.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. Online Legal India is a digital platform. If you require legal assistance, we strongly recommend consulting a qualified lawyer or law firm.