Issue of shares at premium

Issue of shares at premium
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Methods and techniques

Issue of shares at premium term means that comapany 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 comapny 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 seperate account called i.e Securities Premium or Additional Paid-In Capital[1].

An Example[edit]

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

Utilization of Securities Premium[edit]

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[edit]

Issue of shares at discount is a opposite term to issue shares at premium. This term means that comapany 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 1000 USD at price 900 USD this means that discount is 100 USD (company loss). In section 53 of Companies Act this has been prohibited and any of this type of share shall be void[5].

Footnotes[edit]

  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

References[edit]

Author: Bartłomiej Olejniczak

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