Section 52 of Companies Act. Application of premiums received on issue of shares.

“(1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account” and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company.

(2) Notwithstanding anything contained in sub-section (1), the securities premium account may be applied by the company—

(a) towards the issue of unissued shares of the company to the members of the company as fully 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 providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or

(e) for the purchase of its own shares or other securities under section 68.

(3) The securities premium account may, notwithstanding anything contained in sub-sections (1) and (2), be applied by such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, —

(a) in paying up unissued equity shares of the company to be issued to members of the company as fully 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 purchase of its own shares or other securities under section 68.”

Important Ingredients of Section 52 of Companies Act

Premium share:

The company sell number of shares at the face value for normal share capital whereas they reserve some shares for a comparative higher rate of share capital which is known as Premium on shares.

Share Capital:

The total amount a company generate after issuing the number of shares to its investor is referred as Share capital.

Simplifying the Section 52 of Companies Act

The section 52 of Companies Act talks about the shares received as premiums by the company.

The Section 52(1) provides that where and how a company should deposit it’s issued shares for a premium. The aggregate amount which they have received as premium is deposited to a “securities premium account”. It also states that the provision relating to reduction of share capital will apply as if the share premium account were the paid-up share capital of the company.

The Section 52(2) provides for the conditions of permissible use of the securities premium account by the company.

Moreover, the section 52(3) talks about the class of companies that have the ability to apply the securities premium account.

The Heart of Section 52: More Than Just Extra Cash

The provision requires that, in the event that a company issues shares at a premium, the whole amount of the premium to be paid to a designated account known as the “securities premium account.” This account serves as a different financial source from a company’s normal capital.

Beyond a Separate Account: Restrictions and Purpose

The provision allows for the use of securities premium account. The permissible uses and restrictions both are provided.

The Permissible use:

The securities premium account can be applied by the company towards the following use: –

Issue of bonus shares:

By issuing bonus shares to current shareholders with the premium, you can effectively increase their ownership without having to make a further financial contribution.

Redemption of preference shares:

The premium may be applied to preference shares that the company owns and that have the option to be redeemed, or bought back.

Write-off of preliminary expenses:

Costs paid during the company’s establishment, such as registration fees and legal fees, may be covered by the premium.

Issue of fully paid equity shares with ranking rights:

Companies can use the premium to issue new shares that have more rights than the shares that already exist.

Purchase of its own shares or other securities under section 68:

The premium may be used, with certain restrictions, to purchase additional securities or to buy back the company’s own shares.

Restrictions: Balancing interests

The restrictions on the securities premium account exists for several reasons which are as follows: –

Protecting Shareholders:

Preventing abuse of the premium guarantees that its advantages are restricted to shareholders and are not misappropriated for other uses.

Maintaining Financial Clarity:

By keeping the premium distinct, investors are better able to comprehend the company’s actual financial situation.

Promoting Responsible Issuing Practices:

It dissuades companies from artificially raising share values through exorbitant premiums.

Flexibility Attached:

Though, the statement of section 52 seems very much straightforward, still it provides some exceptions and flexibility. Those flexibility are: –

Startups:

There are few exceptions that allow startups to use the premium for costs that are not specifically listed.

Accounting Standards:

Application of the premium in a particular way within the acceptable uses may be further directed by applicable accounting standards.

Minority Shareholder Protection:

Companies using the premium have to be mindful of minority shareholder interests and refrain from unethical behaviour.

Ripple Effect of Premiums

The use of premiums by the company have diverse effect on the various stakeholders:

Shareholder: Their view of the company’s overall financial health and their decision-making regarding investments are influenced by their understanding of how the premium is spent.
Company Finances: Strategic use of the premium can help achieve a number of financial objectives, but prudent management is essential.
Regulators: Maintaining legal compliance and safeguarding investor interests continue to be top priorities.

Keeping Pace with the Evolving Landscape

With the dynamic changes in the corporate legal system and the development of the technology, the chances of inflicting the rights of various stakeholders has also increased. Therefore, the recent developments to refine the framework was given by The Companies (Share Capital and Debenture) Amendment Rules, 2018.

Streamlined Procedures:

They made the procedures for adding premiums to the account and using them for authorized uses simpler.

Enhanced Disclosure:

Companies must give more precise disclosures on the amount of premium they get, how it is allocated, and why it is used.

Focus on Transparency:

Encouraging transparency in premium management fosters confidence and gives investors the ability to make wise choices.

Conclusion

The responsible use of premiums fosters trust, enhances financial stability, and ultimately contributes to a dynamic and well-regulated corporate ecosystem. By understanding the core principles, nuances, and recent developments of section 52 of the Act, all stakeholders can navigate the complexities of managing this financial resource effectively. It is imperative that this financial resource be managed transparently and responsibly.

FAQs

Q1) What is a share capital?

The total amount a company generate after issuing the number of shares to its investor is referred as Share capital. There are two ways through which an investor can be the owner of the share:

Issued share capital
Subscribed share capital

Q2) What is meant by share premium?

The company sell number of shares at the face value for normal share capital whereas they reserve some shares for a comparative higher rate of share capital which is known as Premium on shares.

Q3) Why do people buy shares at premium?

The people agree to buy the shares at premium because of two reasons: –

It is issued by the company having high market reputation.
These shares are well maintained and the investors get guaranteed dividends.

Q4) Is share premium taxable?

If the price of the premium share is 11 UA rule of the rules then the premium shares are taxable.

Q5) Where is the premium gained from shares deposited?

The aggregated sum of money is deposited to a designated account known as the “securities premium account.” This account serves as a different financial source from a company’s normal capital.

Q6) Why is it called premium?

It is because it is purchased by the investors on the price which is higher than the normal price of the share.

Q7) Can private company issue shares at premium?

Subject to the permission of the board of directors, a private company can also issue premium shares.

Q8) What is premium income?

The income which is received by the investors as the dividends of the premium share is known as premium income.

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Section 52 of Companies Act 2013

Aayush Aman

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