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What is Securities Premium and its relevance in Accounting?

What is Securities Premium and its relevance in Accounting?
What is Securities Premium and its relevance in Accounting?

What is Securities Premium?

The Companies Act stipulates that Securities Premium be paid for securities issued. When securities are offered at a price over their nominal value, the requirement is attracted. When corporations issue securities at a price over the nominal value, the rule states that the difference shall be recognized as a securities premium and retained separately. The securities premium is the sum of the nominal value of the securities and the offer price. A business may sell its securities for a price higher than its face value. In such cases, it is believed that the corporation is issuing a premium product. The conditions that businesses issuing premium stock must abide by are listed in the Companies Act.


What is a Security Premium Reserve?

When shares are issued, redeemed, or forfeited, a surcharge known as the “Security Premium Reserve” is added to their face value. According to the Companies Act of 2013, security premiums must be reported in the Reserve & Surplus section of a company’s balance statement, which is located under the Equity & Liabilities section. This item is now listed under Reserve & Surplus. Additionally, reserve and surplus keep track of both gains and losses over time.


What is the relevance of Securities Premium? 

Companies with strong growth prospects and outstanding financial performance may draw cash and debt financing. The names of these businesses are well-known and esteemed by the public. The securities that these firms have issued are thus in great demand. As a result, corporations sell their securities for a lot more than their official value.

Such a topic is referred to as a premium issue. A company’s premium issue could be fully subscribed to when it is released. A fully paid-up membership demonstrates the customers’ trust in the business. The public is therefore willing to pay more than the nominal value for the company’s securities, it can be inferred.

The Act’s Section 52 outlines the legal applications for securities premiums. The purpose of the provision is to prohibit the use of the securities premium for non-capital services. The capital basis of the company’s members would be reduced if capital funds were used for unrelated goals. The Companies Act, therefore, incorporates safeguards to ensure capital preservation and appropriate utilization.


What is the use of Securities Premium?

The following uses of securities premium are permitted under Section 52 of the Act:

  1. When issuing fully paid bonus shares,
  2. For covering the first costs the firm suffered
  3. For covering the costs, commissions, or discounts associated with securities that the corporation has previously issued.
  4. To guarantee the availability of the premium on the redemption of the company’s preference shares or redeemable debentures.
  5. To finance a plan or a buyback of securities that is carried out following Section 68 of the Companies Act.

When can we issue a Security Premium?

Securities of the Company are tradable for consideration more than their face value. The company’s issued securities are therefore expected to be in great demand. In these situations, the corporation may offer the guards a price that is more than their nominal worth. A business doing its first Initial Public Offering (IPO) often cannot select a premium issue.

The prerequisites for issuing securities at a premium are established under the Companies Act. Also, when buying back a company’s securities, the buy-back provisions must be followed. The guidelines for a buy-back are found in Section 68 of the Act. A buy-back agreement enables a company to buy back its securities. The corporation can sell the securities after the buyback for more money than it paid for them. The selling of repurchased securities is not subject to any price restrictions. As a result, a company is permitted by the Companies Act to resell securities at a profit.

The offer price selected by the board of directors is the final sale price of the securities. The company’s securities may be listed on a reputable Indian stock exchange. In these situations, the offer price shouldn’t be overly high in comparison to the AMR (AMP). The AMP is the securities’ trading volume over the previous six months, on average. Utilizing the aggregate trading volume across all recognized exchanges, the AMP should be determined. From the day the offer is publicized, six months should be taken into account.

The offer document for the issuance of securities should make reference to the price reasonable. The method used to determine the price should also be disclosed. When securities are being privately placed, the obligation to disclose the calculation method does not apply.

Written by Ananya Das

Hi I’m Ananya, currently training to become a lawyer. I am a big reader with a love for writing poetry or any sort of creative writing for that matter. I’m also passionate about photography which usually means that I’m the one behind the camera! Quite basically anything related to art, film, music and literature would pique my interest.

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