In this article, we will discuss what is meant by ‘Issue of shares at a premium‘. We will also discuss for what purpose the premium on issue of shares can be used for.
Write short note on issue of share at a premium.
The word “Share” under Section 78 has been replaced by the word “Security” by the Companies (Amendment) Act, 1999. We may, therefore, discuss it under the heading:
Issue of shares (securities) at a premium [Section 78]
Issue of shares at a premium arises when a company is able to sell them at a price above the face value.
The Act stipulates neither any condition nor any restriction regarding the issue of shares at a premium. But the Act does impose conditions regarding the utilization of the amount of premium on shares as follows:
1. The premium cannot be treated as profit and cannot, therefore, be distributed as dividend.
2. The amount of the premium must be credited to a separate account named “Securities Premium Account”.
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3. The amount of the security premium is to be maintained as capitalized profit distributable as provided in Section 78(2).
(a) to issue fully paid-up bonus shares to the members;
(b) to write off the balance of preliminary expenses;
(c) to write off the commission paid or discount allowed or expenses incurred on the issue of shares or debentures of the company;
(d) to provide for the premium payable on redemption of any redeemable securities (preference shares or debentures) of the company.
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