Permissible Uses of Securities Premium Account under Section 52 of Companies Act 2013
Introduction
Companies frequently raise equity capital at a price higher than the nominal (face) value of their shares. The excess received over the face value is termed securities premium and is credited to a distinct ledger called the Securities Premium Account.
While this premium may reflect factors such as strong business fundamentals, valuable assets, intellectual property, brand strength or favourable market perception, it is not a free reserve that can be applied for general business expenditure at the company’s discretion.
Section 52 of the Companies Act 2013 governs how the Securities Premium Account can be used. The provision embodies the principle of capital maintenance, and restricts the application of this balance to a closed list of specified purposes. Any use beyond what is expressly allowed is treated as a violation of the Act and may attract statutory and regulatory consequences.
This article explains:
- What constitutes securities premium
- How it is recognised and parked in the Securities Premium Account
- The five specific purposes for which it can be applied under
Section 52 - The consequences of using it for any unauthorised purpose
What is Securities Premium?
Conceptual understanding
When a company issues shares at a price exceeding their face value, the surplus is recognised as securities premium. The face value is merely an arbitrary nominal value recorded in the company’s capital structure; it does not necessarily correspond to the real economic value of the share.
For example, a company may have:
- Consistent profitability
- Substantial tangible and intangible assets
- Valuable intellectual property or brand name
- An established market reputation and loyal customer base
- Strong growth prospects
In such circumstances, issuing shares at a premium allows the company to raise funds at a price that more accurately reflects its perceived value and future potential, rather than being constrained by the low nominal value of its shares.
Accounting treatment
From an accounting and legal standpoint:
- The face value of shares issued is credited to the Share Capital account; and
- The excess over face value is credited to the Securities Premium Account.
Illustration:
- Suppose a company issues equity shares with a face value of ₹10 at an issue price of ₹18.
- The amount of ₹8 collected over and above the nominal value of ₹10 for each share represents the securities premium.
This ₹8 is transferred to the Securities Premium Account and is treated as a part of shareholders’ funds, carrying statutory restrictions on how it can be used.
Statutory framework under Section 52
Section 52 of the Companies Act 2013 specifically prescribes how the amount in the Securities Premium Account may be utilised.
Key points of the legal framework:
- The Securities Premium Account is not a free reserve.
- It is subject to the same restrictions as if it formed part of the company’s paid-up share capital, except to the extent specifically permitted by
Section 52. - Utilisation is confined to particular, enumerated purposes.
- Any application beyond these purposes must follow the rigorous process applicable to reduction of share capital.
In summary, Section 52 treats securities premium as a quasi-capital reserve, tightly regulated to protect creditors and maintain the company’s capital base.
Permitted Uses of Securities Premium Account
Subject to compliance with the Act and applicable rules, the amount standing to the credit of the Securities Premium Account may be utilised for the following purposes:
- Issue of fully paid bonus shares
- Writing off preliminary expenses
- Writing off certain commission, discount or expenses related to issue of securities
- Providing for premium payable on redemption of certain securities
- Utilisation in connection with buy-back of shares or other securities
Each of these uses is explained below.
1. Issue of Fully Paid Bonus Shares
Nature of bonus issue
A company can capitalise the balance in the Securities Premium Account to issue fully paid bonus shares to its existing members.