Utilization of Securities Premium Account

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This article discusses the concept of Utilization of Securities Premium Account. In this, the author discusses in detail the functions and duties of the Security Premium Account.


Security Premium is a prerequisite under the Companies Act which applies to the issuinge of securities. The necessity is drawn in when the securities are offered at a value that surpasses the ostensible worth. The prerequisite notices that when companies issue securities at a value that is higher than the ostensible worth, the distinction ought to be perceived as a security premium and looked after independently. The contrast between the ostensible worth of the securities and the offer price is known as the Securities premium. A company may issue securities at a value that is more than the ostensible worth.

In such conditions, the company is perceived to make a premium issue. The Securities premium is considered as a capital receipt concerning the company. Capital receipts refer to reserves held got by the company which is not qualified to be considered as a payment. Additionally, the sum accessible in the Securities premium isn’t accessible to the individuals from the company as a profit. Section 52 of the Companies Act 2013 specifies the qualified purposes for which securities premium can be utilized. The goal of this section is to ensure keep an eye that the securities premium isn’t utilized for non-capital purposes. The use of capital funds for random purposes would prompt the disintegration of the capital base of the individuals from the company. Subsequently, the Companies Act has given shields to guarantee maintenance and legitimate use of capital.


At the point when the company chooses to issue shares at a cost higher than the ostensible worth or presumptive worth, it is called issued at a premium. It is a significantly regular practice, particularly when the company has an extraordinary history and a solid monetary exhibitions and standing in the market. For example, if the presumptive worth of a share is Rs 100 and the company issues it at Rs 110. The share is said to have been given at a 10% premium. The premium won’t make a piece of the Share Capital record but yet will be reflected in an uncommon record known as the Securities Premium Account.

Presently, this measure of premium can be called up by the company at some random time, for example, with any call. The overall standard is to gather the premium with either allotment or application cash, rarely with call cash.[1]  The premium account, asaccount as mentioned,we talked about is credited to the Securities Premium Account. This record is found under the heading of Reserves and Surplus on the liabilities side of the Balance Sheet.


  • The securities of the company might be transacted at manymultiple times the presumptive worth. Consequently, huge interest is perceived to be common for the securities issued by the company. In such cases, the company may issue the securities at a value that is several times the ostensible worth. By and large, a company that is disclosing an Initial Public Offer (IPO) interestingly can’t select a premium issue.
  • The Companies Act sets out the conditions which administer the issue of securities at a premium. Likewise, for repurchasing the securities of a company, the provisions identifying with buy-back ought to be followed. The provisions administering a buy-back are accessible in Section 68 of the Act. A company can repurchase its securities under a plan of buy-back. After the repurchase, the company can sell the securities at a value that is higher than the price tag. For the sale of the repurchased securities, there is no roof limit on the cost. Hence, the Companies Act permits a company to sell repurchased securities at a premium price.
  • The offer report for the issue of securities should mention the explanation for the price. It ought to likewise refer to the technique at the estimation of the cost. The prerequisite to reveal the procedure of estimation won’t matter on account of a private placement of securities.
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At the point when the security of a given presumptive worth is given at a cost higher than its assumed worth, the issue is called an issue at a premium and the differential sums a premium. Where the issue cost is lower than the presumptive worth, the issue is regarded as a discount. There are precautionary provisions under Section 52 and 53 for both these situations (premium and discount, respectively) separately individually to defend the issuer company and its stakeholders.


Section 52(1) states where a company issues shares at a premium, regardless of whether for cash or something else, a total equivalent to the total amount of the premium received on those shares will be transferred to a securities premium account and the provisions of this Act identifying with reduction of the share capital of a company will, besides as given in this part, apply as though the securities premium account were the paid-up share capital of the company.


According to Section 52(2), the securities premium account might be utilized by the company in the following ways-

(a) Towards the issue of unissued shares of the company to the individuals from the company as completely 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 accommodating the premium payable on the reclamation of any redeemable preference shares or of any debentures of the company; or

(e) For the acquisition of its shares or different securities under Section 68 of the Act.


Section 52(3) states that the securities premium account might be applied by such class of companies, as might be recommended and whose budget summary follow the accounting standards prescribed for such class of companies under Ssection 133 as-

(a) In paying up unissued equity share portions of the company to be given to individuals from the company as completely paid bonus shares; or

(b) In writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company; or

(c) For the acquisition of its shares or different securities under Section 68.


This was the first premium case, In Head (Henry) and Co Ltd vs. Ropner Holdings Ltd, the Court held that a sum equivalent to the additional worth of resources would need to be carried to the securities premium account.

The court in Drown v Gaumont-British Picture Corpn Ltd, and several other cases held that the securities premium account can’t be treated as profit and, in this way can’t be conveyed as a dividend. Notwithstanding, the same can be distributed in the form of bonus shares. Section 63 (1)(ii) of the Companies Act, 2013 likewise provides gives that securities premium accounts can be used to give completely paid bonus shares. In EIC Services Ltd v. Phipps[2] , the court held that the bonus shares weren’t permitted to be given by capitalization of the securities premium account without the power of a conventional goal of the company and to investors whose shares weren’t completely paid.

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It is presumed that the issue of securities at a premium has numerous limitations in its usage. First and foremost, the premium can’t be treated as profit and thus, can’t be distributed as dividends. Secondly, the amount of premium, regardless of whether it was real money or kind, should be recorded in a different account;: securities premium account. Thirdly, the amount of share premium is to be kept up with a similar sacredness as the share capital. The securities premium account can be diminished only just if there is approval by Articles of Association and must be decreased in a manner as the share capital is decreased. The securities premium account can’t be treated as profit and can’t be distributed as dividends, however it can be dispersed in the form of bonus shares. There has been an incorporation of a new provision in the 2013 Companies Act which is worried about certain particular classes of companies.