Issue of Shares at Premium
We all know that the capital of a company consists of shares. The Public Company invites the public to apply for and subscribe to its share capital. For this purpose, it also issues a Prospectus. The company generally issues its shares at par i.e. at its face value. However, a company may choose to bring an Issue of Shares at Premium.
The issue of shares at premium refers to the issue of shares at a price higher than the face value of the share. In other words, the premium is the amount over and above the face value of a share.
Usually, the companies that are financially strong, well- managed and have a good reputation in the market issue their shares at a premium. For example, if a company issues a share of nominal or face value of ₹10 at ₹11, it issues it at 10% premium.
A company may call the amount of premium from the applicants or shareholders at any stage, i.e. at the time of application, allotment or calls. However, a company generally calls the amount of Premium at the time of allotment.
Accounting treatment of Securities Premium
The company needs to credit the amount of Premium in a separate account i.e. Securities Premium A/c, as it is not a part of the Share Capital. It is actually a gain for the company. As per the Companies Act, 2013 the company shows the credit balance of the Securities Premium A/c under the heading ‘Reserves and Surplus’ on the liabilities side of the Balance Sheet.
Also, section 52 of the Companies Act, 2013 states how a company can use the Securities Premium. The following are the provisions regarding this:
- The company can use the amount towards the issue of un-issued shares to the shareholders or members of the company as fully paid bonus shares.
- It can use this amount to write off the preliminary expenses.
- The company may use it to pay the premium on the redemption of debentures or redeemable preference shares.
- It can also use this amount to write off the expenses incurred, commission paid or discount allowed on the issue of any securities or debentures.
- It can also use it for buy-back of own shares or any other securities.
If securities premium is to be collected on allotment or a call, the company may adopt either of the following two courses:
(i) When the allotment money (or the call) becomes due, Share Capital Account will be credited with the total amount becoming due on account of share capital and Securities Premium Account will be credited with the total amount of securities premium becoming due and with the total of the two, Share Allotment Account (or the relevant Share Call Account) will be debited.
On receipt of the money, Bank will be debited and Share Allotment Account (or the relevant call account) will be credited with the total amount received.
(ii) In the second method, the amount of securities premium will be ignored when the entry for making the allotment money (or the call) due is passed; thus Share Allotment Account (or the relevant Share Call Account) will be debited and Share Capital Account will be credited with the total amount becoming due on account of share capital and no entry will be passed for securities premium becoming due.
When the allotment money (or the relevant call) is actually received, Bank will be debited with the total amount received, Share Allotment Account (or the relevant Share Call Account) will be credited with the amount received on account of share capital and Securities Premium Account will be credited with the amount of premium received.
Considering that the Companies Act has placed restrictions on the applications of Securities Premium Account, the second method is considered better in which Securities Premium Account will be credited only when the amount of securities premium has actually been received in cash.