What is the Issue of Shares at Premium?
Issue of shares at the premium means the amount demanded by the company at the time of issue of shares is more than the face value of shares. It may serve as the security money or the goodwill money which is being demanded by the company. For example - the face value of shares is Rs 10 per share, but the company issues it for Rs 15 per share. Here the Rs 5 charged additionally by the company is the premium amount. So when the shares are issued over and above the face value of the share is said to be issued at a premium.
Journal Entries to be Passed at the Time of Issue of Share at Premium
How to Utilise the Securities Premium Account
As per Section 52(2) of Companies Act 2013 states that premium on issue of shares can be used for:
Issuing fully paid-up bonus shares
It can be used while writing the preliminary expenses of the company
Writing off the expenses of, or the commission paid or discount allowed on any issue of securities or debentures of the company
Providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company
In purchasing its own shares that are buyback of shares
Presentation of Securities Premium Reserve Account in Balance Sheet
Securities premium amount is capital in nature which means it is not received frequently by the company. Hence, when the shares are issued at a premium, it is credited to the securities premium received in the account. It is shown under the head shareholders fund under the subhead reserves and surplus. It is shown under the Equity and Liabilities part of the balance sheet as per Schedule III of the Companies Act 2013.
Solved Questions
1. MNO Ltd. invited applications for 40000 equity shares of Rs 10 each, and the complete amount is payable at the time of application at the premium of Rs 2 each. The issue was fully subscribed, and shares were duly allotted. Pass the journal entries.
Solutions:
Journal Entries to be Passed at the Time of Issue of Shares
2. Neeta Ltd invited applications for issuing 1500 shares of Rs 10 each at a premium of Rs 3 per share payable as follows: Rs 4 on application, Rs 4 on the allotment (including premium) balance on the first and final call. Applications were received for 1500 shares. All money was received as and when due. Journalise.
Solutions:
Journal Entries to be Passed at the Time of Issue of Shares
Conclusion
The Securities Premium Amount means the excess of the issue price of the share over and above the face value of the shares issued. The amount of securities reserve received is the capital receipt in nature. The provisions of the Companies act 2013, it restricts the usage of the securities premium money. If nothing is mentioned in question regarding the receipt of money of premium it is deemed to be received at the due of allotment money.
FAQs on Issue of Shares at a Premium: A Guide
1. What does it mean to issue shares at a premium?
Issuing shares at a premium means a company sells its shares at a price higher than their nominal or face value. For example, if a share with a face value of Rs. 10 is issued to the public for Rs. 15, the extra Rs. 5 collected is the premium. This additional amount reflects the company's strong reputation, goodwill, and high demand in the market.
2. What are the standard journal entries for recording the issue of shares at a premium?
The accounting treatment for shares issued at a premium involves two key entries, assuming the premium is collected with allotment money:
1. On receipt of allotment money (including premium):
Bank A/c Dr.
To Share Allotment A/c
2. On making the allotment money due and transferring the premium:
Share Allotment A/c Dr.
To Share Capital A/c (with face value)
To Securities Premium A/c (with premium amount)
3. How is the Securities Premium Account presented in a company's Balance Sheet as per Schedule III?
The Securities Premium amount is a capital receipt and is shown on the Equity and Liabilities side of the Balance Sheet. It is presented under the major head 'Shareholders' Funds' and the sub-head 'Reserves and Surplus'. It is disclosed as a separate item within the notes to accounts for 'Reserves and Surplus'.
4. Can you provide a simple example of issuing shares at a premium?
Certainly. Imagine ABC Ltd. decides to issue 10,000 equity shares. The face value of each share is Rs. 10, but due to its strong financial performance, the company issues them at Rs. 12 per share. In this case:
- The face value is Rs. 10.
- The issue price is Rs. 12.
- The premium per share is Rs. 2 (Rs. 12 - Rs. 10).
The total premium collected by the company will be Rs. 20,000 (10,000 shares × Rs. 2), which is transferred to the Securities Premium Account.
5. Why would a company choose to issue shares at a premium instead of at their face value?
A company issues shares at a premium for several strategic reasons:
- High Demand and Goodwill: It signals that the company is financially sound, has a strong reputation, and is in high demand among investors.
- Additional Capital: It allows the company to raise more capital without issuing a correspondingly higher number of shares, thus preventing excessive dilution of ownership.
- Specific Financial Needs: The premium collected is a capital receipt that can be used for specific purposes defined by law, such as funding a share buy-back or writing off preliminary expenses, thereby strengthening the company's financial structure.
6. What specific purposes can the amount in the Securities Premium Account be used for, according to the Companies Act, 2013?
As per Section 52(2) of the Companies Act, 2013, the amount in the Securities Premium Account can only be utilised for the following five purposes:
- To issue fully paid-up bonus shares to members.
- To write off the preliminary expenses of the company.
- To write off expenses, commission, or discount allowed on any issue of shares or debentures.
- To provide for the premium payable on the redemption of any redeemable preference shares or debentures.
- For the purchase of its own shares or other specified securities (buy-back).
7. What is the key difference between issuing shares at a premium and at a discount?
The primary difference lies in the issue price relative to the face value. Issuing at a premium means the issue price is higher than the face value, which is a common practice for healthy companies. In contrast, issuing at a discount would mean the issue price is lower than the face value. However, as per Section 53 of the Companies Act, 2013, a company is prohibited from issuing shares at a discount, with the only exception being the issue of sweat equity shares.
8. Are there any restrictions on a company when issuing shares at a premium?
While there are no restrictions on the amount of premium a company can charge, there are strict regulations on the utilisation of the premium collected. The primary restriction is that the amount credited to the Securities Premium Account cannot be treated as a free reserve for purposes like distributing dividends to shareholders. It must be used exclusively for the purposes specified under Section 52(2) of the Companies Act, 2013, making it a restricted-use capital reserve.
