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Issue Of Shares At Premium


Shares are the small unit of a company's ownership that helps the company is raising capital from the market by issuing them and getting funds in return from the investors. After buying these shares, an investor becomes the shareholder of the company. Public companies directly issue the shares in the share market so that the investors can subscribe to them. On the other hand, private companies take the help of IPO or Initial Public Offering to issue the shares in the market for the general public.

Shares can be issued at their face value, i.e., at par, at the value more than their face value, i.e., at a premium, and the value less than their face value, i.e., at discount. Here we are going to discuss the issue of shares at a premium in detail.

Issue Of Shares At Premium

The price received from the issue of shares at a premium from the face value of the shares is the premium amount. Generally, a company with a higher Goodwill in the market and excellent financial records can issue its shares at a premium due to the high demand of the company's shares among the investors.

There is no legal restriction on the issue of shares at a premium and also the company is free to call the premium amount anytime without any call.

What is Securities Premium Account?

The companies generally issue the shares at par or their nominal value or can say original value but sometimes a company can issue its shares at a price higher than the original or nominal value of the share. Such an issue of shares is known as shares issued at a premium.

In this case, the amount of premium or the amount over par value is not transferred to the share capital account; instead, it is transferred or credited to a newly opened account called a security premium account. This is because the premium is a Capital profit for the company and not a revenue profit. This can be clearly understood from the given example:

The face value of a company's share is Rs. 10 and that share is issued at a value of Rs. 13 which is Rs. 3 more than the face value. So, this Rs. 3 will be the premium on the share and will be transferred to the Security Premium Reserve Account.

Security Premium Reserve Account is presented under the head Reserves and Surplus on the equity & liabilities side of the balance sheet of the company.

Provisions for Security Premium

The company is restricted to using the amount of security premium. There are certain provisions given by Section 52 of the Companies Act, 2013 about the use of securities premium reserves which are given below:

  • In issuing fully paid bonus shares to the existing shareholders to hold the profit.
  • To write off the company's preliminary expenses.
  • To write off the expenses, commission, or discount allowed on the issue of the company's shares and debentures.
  • To provide for the premium that the company has to pay on redemption of redeemable preference shares or debentures.
  • For Buyback of the company's shares and other securities in the market as per Section 68.

Difference between Security Premium Account and Security Premium Reserve Account

There is not any major difference between the terms Securities Premium A/c and Securities Premium Reserve A/c. Section 52 (2) of the Companies Act, 2013 stated that the term Securities Premium A/c is used to transfer or credit the amount of premium whereas the term or head Securities Premium Reserve A/c is also used for the same purpose but as per Schedule III of the Companies Act, 2013. Section 52 (2) and Schedule III is the basis of their difference but both of these are used for the same purpose. So, it is allowed to use either of the two terms while passing the journal entries.

Accounting Treatment for Shares Issued at Premium

The company can charge the amount of premium on application, allotment, or even on calls. Also, the company can charge this amount at one-time or can divide it among the application, allotment, and calls. It is all up to the choice of the company when it demands the premium amount and how it divides it among the calls. There are two different types of entries passed when the shares are issued on premium. They include:

Premium Received on Application

The company will pass the following entries in its books if the premium amount is received along with the application:

1. Bank A/c Dr.

To Share Application A/c

(Money on the application received along with the amount of premium)

2. Share Application A/c Dr.

To Share Capital A/c

To Securities Premium A/c

(Money on the application is transferred to Share Capital A/c and Securities Premium A/c)

Premium Received on Allotments or Calls

If the amount of securities premium is charged on allotment or calls, then the company will pass the following entries:

1. Share Allotment A/c Dr.

To Share Capital A/c

To Securities Premium Reserve A/c

(Money on the allotment is due along with securities premium)

2. Bank A/c Dr.

To Share Allotment A/c

(Money on the allotment is received along with securities premium)

Note: An important point to be noted while solving the questions of securities premium is that generally, it is mentioned in the question when the company will receive the securities premium amount, i.e. whether on application, allotment, or calls. But if such information is not given in the question then it is assumed that the securities premium is due along with the money of allotment.

Advantages of Issue of Shares at Premium

Issue of shares at a premium is a forward-looking decision for a company because it helps the company in being financially stronger and healthier. There are several benefits of issuing shares at a premium which include the following:

For the Promoters

  • It helps in keeping the share capital low.
  • It keeps the reserves of the company high.
  • Premium increases the book value per share of the company.
  • It also makes the earning per share higher.
  • The company can easily issue bonus shares in the future because of its stronger capital base.
  • The company can easily issue the shares at a premium to other joint venture partners or the public in the future also.
  • A strong capital base, higher reserves, the higher book value of shares, higher earnings and dividend per share, etc. represent the financial strength of a company. With a strong financial system, the company can easily raise funds in the market through the way of capital and borrowing.
  • Issuing shares at a premium is helpful in reducing the cost of capital. This is because:
  • it decreases a lot of work-related to administration,
  • reduced stamp duty that is payable on shares capital issued and/or share certificates,
  • authorized capital fess is to be paid only on authorized share capital,
  • less number of share certificates are issued, and
  • fewer fees are payable to the Registrar of the companies due to lower authorized capital and share capital.
  • Also, it decreases the cost of servicing capital because the company pays the dividend on paid-up share capital and not on premium.

For the Shareholders

Various advantages of buying shares at a premium for the shareholders are as follows:

  • Shareholders get ownership in the company by buying shares.
  • Shareholders should invest their money in a company with a stronger capital base instead of a company with a weaker capital base. This is because a stronger company guarantees the shareholders a regular source of income.
  • Other than this, a stronger base also helps the shareholders in getting more wealth.
  • Because of the higher EPS, higher dividend, and higher price to book value ratio, the prices of the company's shares increase many times more than book value per share. This makes a company investor-friendly and is helpful for the shareholders in earning more dividends.
  • If a company is issuing shares at a premium then it means there is a higher possibility for the shareholders to get more rewards in the form of bonus shares, the right issue at a lower price, preferential offers in new ventures of a company which are owned and managed by the original company and its associates.

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