Companies Act – Securities Premium
Companies Act – Securities Premium
Securities Premium is a requirement under the Companies Act which applies to the issue of securities. The requirement is attracted when the securities are offered at a price which exceeds the nominal value. The requirement mentions that when companies issue securities at a price which is higher than the nominal value, the difference should be recognised as securities premium and maintained separately. The difference between the nominal value of the securities and the offer price is known as the securities premium. A company may issue securities at a price which is more than the nominal value. In such circumstances, the company is understood to be making a premium issue. The Companies Act mentions the requirements which should be followed by companies making a premium issue.
The securities premium is considered as a capital receipt on the part of the company. Capital receipts refer to funds received by the company which are not eligible to be considered as income. Hence, companies are allowed to make use of capital funds only for specific purposes. The purposes should be related to the expansion of the business of the company. Also, the amount available in the securities premium is not available to the members of the company as a dividend.
Financially successful companies with good growth prospects can attract capital and debt funds. The names of these companies are recognised and regarded with esteem by the public. Hence, the securities issued by such companies are in high demand. Thus, the companies issue securities at a price which is significantly higher than the nominal value. Such an issue falls under the category of a premium issue. When a company makes a premium issue, the issue may be subscribed entirely. A full subscription reflects the confidence that the subscribers have on the company. Accordingly, it can be inferred that the public is willing to pay more than the nominal value to purchase the securities of the company.
Section 52 of the Act mentions the eligible purposes for which securities premium can be used. The objective of the section is to ensure that the securities premium is not used for non-capital purposes. Usage of capital funds for unrelated purposes would lead to erosion of the capital base of the members of the company. Hence, the Companies Act has provided safeguards to ensure retention and proper utilisation of capital.
- The securities of the company may be transacted at multiple times the face value. Hence, significant demand is understood to be prevalent for the securities issued by the company. In such cases, the company may issue the securities at a price which is several times the nominal value. Generally, a company which is making an Initial Public Offer (IPO) for the first time cannot opt for a premium issue.
- The Companies Act lays down the conditions which govern the issue of securities at a premium. Also, for repurchasing the securities of a company, the provisions relating to buy-back should be followed. The provisions governing a buy-back are available in Section 68 of the Act. A company can repurchase its securities under a scheme of buy-back. After the repurchase, the company can sell the securities at a price which is higher than the purchase price. For sale of the repurchased securities, there is no ceiling limit on the price. Thus, the Companies Act allows a company to sell repurchased securities at a premium price.
- The offer price of securities determined by the board of directors is considered to be the final sale price of the securities. Listing of the securities of the company may be performed on a recognised stock exchange in India. In such cases, the offer price should not be disproportionately excessive compared to the Average Market Price (AMP). The AMP refers to the price at which the securities were traded for the preceding six months. The cumulative trading volume in all the recognised exchanges should be considered for calculating the AMP. The six months should be calculated commencing from the date of announcement of the offer.
- The offer document for the issue of securities should mention the justification for the price. It should also mention the methodology for the calculation of the price. The requirement to disclose the methodology of calculation will not apply in the case of a private placement of securities.
Allotment for Non-cash Consideration
A company may enter into a registered or oral agreement for the purchase of goods or services. The settlement for the agreement may be delivered in the form of non-cash consideration. The company may allot securities to settle the non-cash consideration. In such cases, the specified procedure should be followed for ascertaining the amount of securities premium. The specified procedure is the following:
- The total number of securities which have been allotted to the contractor should be considered.
- The total number of securities should be multiplied with the nominal value per security. The resultant amount will be the aggregate nominal value of the securities allotted.
- The total value of the contract should be considered. The value should be ascertained from the amount mentioned by the contractor in the invoice. In case there are multiple invoices, the cumulative value should be considered.
- The difference between the aggregate nominal value of the securities and the total value of the contract should be considered. The amount of the difference should be considered as the securities premium.
- In particular instances, the value of the contract may not be directly ascertainable from invoices or other documentation. In such cases, the arms’ length price for the transaction can be taken as the contract value.
Capital Treatment of Securities Premium
- The securities premium should be treated in the same manner as the paid-up capital of the company. Hence, the provisions of the Act which govern reduction of capital should be applied to securities premium also. The company may be undertaking an exercise of reduction of capital. In such cases, corresponding to the capital reduction, the securities premium should also be reduced.
- The company may take steps for altering the balance reflected in the securities premium account. In such cases, authorisation by the Articles of the company is necessary.
- Reduction in securities premium is allowed towards the purpose of cancellation of losses. However, the losses should have been incurred as a consequence of trading in securities. Additionally, the balance in the account can be utilised for meeting a deferred tax liability.
- Accumulated losses reflected in the assets side of the balance sheet can be adjusted against securities premium. However, to approve the alteration, the members should pass a resolution. An extraordinary general meeting (EGM) of the members must be convened to satisfy the requirement of authentication for the resolution. Also, consent must be obtained from the lenders of the company. The reduction in securities premium is allowed only in accompaniment with a parallel reduction in the capital.
- Securities premium is a capital amount. Hence, securities premium cannot be used as a source to declare a dividend. The Companies Act allows bonus shares to be issued from the securities premium. However, the issue should be authorised by the members of the company. The members should pass a resolution for approving the issue. Also, bonus shares should not be issued to holders of partly-paid securities.
Usage of Securities Premium
According to Section 52 of the Act, securities premium can be used for the following purposes:
- For the issue of fully paid bonus share capital
- For meeting the preliminary expenses incurred by the company
- For meeting the expenses, commission or discount incurred concerning securities previously issued by the company
- For ensuring the availability of the premium on the redemption of redeemable debentures or preference share capital of the company
- For funding a scheme or buy-back of securities which is conducted in compliance with the provisions of Section 68 of the Companies Act
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