# Issue of Shares at Premium

When a company issues shares at a price higher than the face value, it is called an issue at premium. The excess over face value is the premium.

## 1. Concept

Face Value: ₹10
Issue Price: ₹50
Premium: ₹40 per share → goes to Securities Premium Account

## 2. Securities Premium Account (SPA)

Created under Section 52 of the Companies Act, 2013.
All premium amounts (whether received in cash or kind) are credited to this account.
Treated at par with paid-up capital for the purpose of capital reduction (i.e., reducing SPA follows the same procedure as reducing share capital).

## 3. Permitted Applications of Securities Premium Account (Section 52(2))

The SPA may be used ONLY for:

#	Purpose
a	Issue of fully paid bonus shares to members
b	Writing off preliminary expenses of the company
c	Writing off expenses/commission/discount on issue of shares or debentures
d	Providing for premium payable on redemption of redeemable preference shares or debentures
e	Purchase of its own shares / securities under Section 68 (Buy-back)

## 4. Restrictions

SPA cannot be distributed as ordinary dividend to shareholders.
It is a capital reserve — must be used only for the specific purposes listed.

## 5. Special Class of Companies (Section 52(3))

Certain prescribed class of companies (whose financial statements comply with prescribed accounting standards) may use the securities premium only for purposes (a), (b), and (e) of sub-section (2).

## Memory Aid — Uses of SPA: "BPED-B"

Bonus shares
Preliminary expenses written off
Expenses/commission/discount on issue
D for premium on Redemption of preference shares/debentures
Buy-back of own securities

## Important Notes

The SPA appears under "Reserves & Surplus" in the balance sheet.
Premium can be received in kind (e.g., when shares are issued for consideration other than cash like assets).
Using SPA for dividend or any purpose not in Section 52(2) violates the Act and amounts to misuse of capital.

Worked example

### Example 1

Example 1 — Computing Premium: A company issues 10,000 shares of ₹10 face value at ₹35. What is the total premium and the journal treatment?

Answer: Premium per share = ₹35 - ₹10 = ₹25. Total premium = 10,000 × ₹25 = ₹2,50,000. Journal: Dr Bank ₹3,50,000 → Cr Share Capital ₹1,00,000; Cr Securities Premium A/c ₹2,50,000.

### Example 2

Example 2 — Permissible Use: Can a company use its Securities Premium Account to pay 12% dividend to equity shareholders?

Answer: No. Distributing SPA as ordinary dividend is NOT a permitted use under Section 52(2). The only allowed uses are bonus shares, writing off preliminary/issue expenses, premium on redemption, and buy-back.

### Example 3

Example 3 — Bonus Issue from SPA: SPA balance is ₹50 lakh. Company has 1,00,000 fully paid equity shares of ₹10. Can it issue 1:2 bonus shares from SPA?

Answer: 1:2 bonus = 50,000 new shares of ₹10 = ₹5,00,000 required. SPA of ₹50,00,000 is sufficient. Permitted under Section 52(2)(a).

⚠️ Common exam mistakes

Treating premium as a free reserve available for dividends — it is a capital reserve restricted to specific uses.
Forgetting that premium received in 'kind' is also routed through SPA.
Using SPA to write off losses or general business expenses — not permitted.
Confusing premium with discount — discount on issue of shares is prohibited (other than sweat equity), whereas premium has no upper limit.

Bare-Act text Section 52 · Companies Act, 2013 · click to expand

Section 52(1) – Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a 'securities premium account'. Section 52(2) – The securities premium account may be applied by the company — (a) towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares; (b) in writing off the preliminary expenses of the company; (c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; (d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or (e) for the purchase of its own shares or other securities under section 68.

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Issue of Shares at Premium - Securities Premium Account (Section 52)

Worked example

⚠️ Common exam mistakes