Issue of shares at premium

From CEOpedia | Management online

Issue of shares at premium term means that company issue shares at bigger price then the par value (known also as a nominal value of the shares). Amount above the par value from the issuer perspective is a pure gain. In theory it can be issued by every company but in practice investors would not buy shares at higher price from companies that they do not trust. Most commonly this is ussued by companies which are strong in the market and with good reputation. Company needs to record gain from premium on separate account called i.e. Securities Premium or Additional Paid-In Capital[1].

An Example

A well known and respected company ABC decided to issue shares at premium. Market price of the shares is US$900 (par value) together with premium they issued it for US$1000. Shares were bought by investors so this gives to company ABC gain of US$100 from premium which goes to the Securities Premium account[2].

Utilization of Securities Premium

There are some rules how funds from Securities Premium can be used. It was regulated i.e. in section 52 of Indian Companies Act. Accorrding to this act securities premium account can be utilized by the company[3]:

  • "towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares"
  • "in writing off the preliminary expenses of the company"
  • "in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company"
  • "in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company"
  • "for the purchase of its own shares or other securities"

Other types

Issue of shares at discount is an opposite term to issue shares at premium. This term means that company issues shares at lower price then the par value. Using other words from issuer perspective it is a loss to company[4]. An company ZXY issues shares of US$1000 at price US$900 this means that discount is US$100 (company loss). In section 53 of Companies Act this has been prohibited and any of this type of share shall be void[5].

Footnotes

  1. ↑ Tulsian P.C., Tulsian B., (2010), p.8.11
  2. ↑ Bhattacharyya A. K., (2012), p.243
  3. ↑ Ministry of Corporate Affairs., (2013), p.45-46
  4. ↑ Bose C. D., (2010), p.244
  5. ↑ Ministry of Corporate Affairs., (2013), p.46


Issue of shares at premium — recommended articles
Unit trust — Advantages of corporation — Cash bond — Distribution In Kind — Options — Cumulative Preferred Stock — Class Of Shares — Memorandum account — Redeemable shares

References

Author: Bartłomiej Olejniczak

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