Securities Premium Account and the Permitted Applications Under Section 52

This article sets out what securities premium is and the five purposes for which Section 52 of the Companies Act, 2013 permits the balance to be applied.

It matters because the balance in the account is often large after a funding round, and a proposal to use it for an expense, a distribution or a buy-back should be tested against the statutory list before the board or the shareholders act. Reviewing the use in advance is far easier than regularising it afterwards.

Q1. What is securities premium, and why is its use restricted?

Securities premium is the amount a company receives for its shares over and above their face (nominal) value. It is credited to the Securities Premium Account. Face value is only a nominal figure and need not reflect the economic worth of a share. The premium a company can command may reflect its accumulated profits, assets, intellectual property, brand, market position or customer base.

The amount is a capital receipt and not trading profit. For that reason the account is treated as a restricted capital reserve. Confining its use to a statutory list protects shareholders and creditors and maintains the company's capital.

For illustration, a share of face value Rs 10 issued at Rs 40 brings Rs 10 into share capital and Rs 30 into the Securities Premium Account.

Q2. For which purposes may the account be used?

Section 52 permits the balance to be used only for the purposes it specifies: