When a company raises money by selling shares, the price of those shares is not always limited to their face value (the value printed on the share certificate). Sometimes, investors are ready to pay more than this face value. The extra amount paid by investors is called a securities premium.
This concept is important because it shows the investor trust and confidence and also helps the company enhance its financial position in the market. The Companies Act, 2013, lays down clear rules about how securities premium should be recorded, used, and protected.
In this blog, we will understand what the securities premium is, how it is created, its legal treatment, permissible uses and its importance for companies.
What is Securities Premium?
Every share has a face value (or nominal value). For example, if a share’s face value is ₹10 but the company issues it at ₹15, the extra ₹5 is securities premium.
This premium amount is transferred to a special account called the Securities Premium Account. The law says this money cannot be treated as normal profit. Instead, it has specific permitted uses, and companies must maintain it carefully.
Legal Framework under the Companies Act, 2013
Section 52 of the Companies Act, 2013, governs securities premium. It clearly says:
- Any premium received on shares must be transferred to the Securities Premium Account.
- This account is treated almost like share capital.
- The money cannot be used freely or for day-to-day expenses.
- Its use is restricted to purposes that benefit the company and its shareholders.
This ensures investor contributions are not misused.
Permissible Uses of Securities Premium
The law allows securities premium to be used only for certain purposes:
- Issuing Bonus Shares – Companies can issue fully paid bonus shares to existing shareholders.
- Writing Off Expenses – Expenses of forming a company or issuing shares/debentures can be adjusted against securities premium.
- Adjusting Discount on Issue of Securities – If shares are issued at a discount, the loss can be set off against premium.
- Premium Payable on Redemption – When preference shares or debentures are repaid at a premium, the amount can be met from securities premium.
- Buy-Back of Shares – It can also be used when the company buys back its own shares, subject to legal rules.
Important Note: Securities premium cannot be distributed as dividends.
Why is Securities Premium Important?
Securities premium is not just a legal requirement but also valuable for companies in many ways:
- Investor Confidence – Investors paying more than face value show trust in the company’s future.
- Stronger Financial Position – Treated as part of capital, it boosts the company’s reserves.
- Helps Manage Expenses – Certain costs like redemption premiums or issue-related expenses can be met from this account.
- Better Market Image – Companies able to issue shares at a premium are often seen as financially strong and credible.
Compliance Requirements
Companies must be careful in handling securities premiums. Key requirements include:
- Proper Accounting – The premium must be recorded in the Securities Premium Account.
- Restricted Use – It cannot be used for general expenses or dividends.
- Clear Disclosure – It should be shown in the balance sheet under “Reserves and Surplus.”
- Follow SEBI Rules – Listed companies must also follow SEBI guidelines while issuing shares at a premium.
Non-compliance can lead to penalties and loss of reputation.
Accounting Treatment
From an accounting point of view, securities premium is a capital reserve, not a revenue profit. That’s why it cannot be used for normal business operations or profit distribution. Auditors check this account during audits to ensure proper compliance.
Practical Examples
- Startup Scenario: A tech startup issues shares with a face value of ₹10 at a price of ₹100. The ₹90 excess represents securities premium, reflecting high investor confidence in its innovative model.
- Established Company: A reputed manufacturing company issues shares worth ₹10 at ₹15. The ₹5 collected as premium is later used to issue fully paid bonus shares to loyal shareholders.
These examples highlight how securities premium works in real business contexts.
Benefits of Maintaining Securities Premium
- Enhances Shareholder Value – By converting premium into bonus shares.
- Provides a Cushion – For future needs like redemption premium or share issue expenses.
- Improves Credibility – Higher reserves increase trust among lenders and investors.
- Shows Good Governance – Following the law strictly improves the company’s reputation.
Consequences of Non-Compliance
If a company misuses securities premium or fails to maintain proper records:
- Legal action can be taken under the Companies Act.
- Directors may face penalties.
- Investor trust and market image may be damaged, which can hurt the company more than financial penalties.
Conclusion
Securities premium under the Companies Act, 2013, is more than just an extra amount collected from shareholders. It is a capital fund that indicates the investor trust, strengthens the company’s reserves, and supports specific financial needs.
Companies must manage it carefully as per the law. Responsible use of securities premium is not only about avoiding legal trouble but also about building investor confidence, trust and long-term credibility. Moreover, by channelling this reserve into productive avenues like expansion, debt repayment or bonus issues, businesses can enhance their growth potential. Thus, securities premium, when handled calculatedly, becomes not just a legal compliance requirement but also a special tool for sustainable financial planning; it also ensures the long-term value creation for both the company and its stakeholders.
FAQs
1. Can securities premiums be used to pay dividends?
No, it cannot. The law restricts its use to specific purposes like bonus shares or writing off expenses.
2. Is securities premium the same as share capital?
While treated similarly, it is technically a capital reserve distinct from share capital.
3. Can private companies also issue shares at a premium?
Yes, both private and public companies are allowed to issue shares at a premium.
4. What happens if a company misuses securities premium?
Non-compliance may lead to penalties, legal consequences, and loss of goodwill.
5. How is securities premium shown in financial statements?
It is disclosed under “Reserves and Surplus” in the balance sheet.
