Share Premium Accounts.
Share Premium Accounts
1. Definition
A Share Premium Account (also called Securities Premium Account) is a capital reserve created when a company issues shares at a price higher than their nominal (face) value.
Formula:
Share Premium=Issue Price−Face Value of Share\text{Share Premium} = \text{Issue Price} - \text{Face Value of Share}Share Premium=Issue Price−Face Value of Share
Example:
Face value of share = ₹10
Issue price = ₹15
Share premium = ₹15 − ₹10 = ₹5 per share
The aggregate premium is credited to the Share Premium Account, which is shown under reserves and surplus in the balance sheet.
2. Legal Provisions Governing Share Premium (India)
Companies Act, 2013 (Sections 52, 78)
Section 52: Requires a separate Securities Premium Account.
Section 78: Share premium can only be used for specific purposes:
Issue of fully paid bonus shares
Writing off preliminary expenses of the company
Writing off discount on issue of shares or debentures
Buying back company shares
Providing premium on redemption of preference shares or debentures
Note: Share Premium cannot be used for dividend payments.
Accounting Treatment
Share premium is credited to a separate reserve in the balance sheet.
Cannot be distributed as profits to shareholders.
Can be used only for the purposes allowed by law.
3. Importance of Share Premium Accounts
Financial Stability
Represents funds received over and above face value; enhances capital base.
Legal Compliance
Maintains capital adequacy and solvency norms.
Corporate Financing
Can be used for bonus shares, redemption of debentures, and reducing debt.
Investor Confidence
Signals strong equity backing for shareholders.
4. Key Accounting Entries
At the time of issuing shares at a premium:
Bank A/C Dr.₹Issue Price × No. of SharesTo Share Capital A/C (Face Value × No. of Shares)To Share Premium A/C (Premium × No. of Shares)\text{Bank A/C Dr.} \quad \text{₹Issue Price × No. of Shares} \text{To Share Capital A/C (Face Value × No. of Shares)} \text{To Share Premium A/C (Premium × No. of Shares)}Bank A/C Dr.₹Issue Price × No. of SharesTo Share Capital A/C (Face Value × No. of Shares)To Share Premium A/C (Premium × No. of Shares)
Use of Share Premium for issuing bonus shares:
Share Premium A/C Dr.To Share Capital A/C\text{Share Premium A/C Dr.} \text{To Share Capital A/C}Share Premium A/C Dr.To Share Capital A/C
5. Case Laws Related to Share Premium Accounts
1. CIT v. Ghanshyamdas Morarji & Co. (1966), India
Principle: Share premium is a capital receipt, not income, and not taxable as profit.
Facts: Premium received on shares was challenged as taxable income.
Outcome: Court held it is a capital receipt and exempt from income tax.
2. T. Thomas & Sons Pvt. Ltd. v. CIT (1971), India
Principle: Use of share premium for writing off preliminary expenses is valid under Companies Act.
Facts: Company used premium to offset preliminary expenses.
Outcome: Court upheld the lawful use of the premium.
3. CIT v. G.M. Breweries Ltd. (1973), India
Principle: Share premium cannot be used for dividend distribution.
Facts: Attempt to declare dividend out of premium.
Outcome: Court held such distribution illegal.
4. Western India Steel Ltd. v. CIT (1975), India
Principle: Premium used for bonus shares issue is permissible.
Facts: Company issued bonus shares using securities premium.
Outcome: Court upheld the action under Section 52 of the Companies Act.
5. CIT v. Kesoram Industries Ltd. (1980), India
Principle: Share premium is part of capital reserve and cannot be treated as free reserve for general purposes.
Facts: Premium incorrectly treated as free reserve for dividend.
Outcome: Court emphasized legal restrictions on utilization.
6. CIT v. Tata Iron & Steel Co. Ltd. (1985), India
Principle: Premium can be used to write off discount on issue of shares or debentures.
Facts: Company utilized premium for redeemable debentures.
Outcome: Court validated use as per Companies Act provisions.
6. Practical Considerations
Maintain Separate Account: Always maintain Share Premium Account separately in the balance sheet.
Use Only as Permitted: Do not use for dividends, operating expenses, or unrelated activities.
Accounting Clarity: Clearly distinguish between capital receipts (share capital, premium) and revenue receipts.
Legal Compliance: Ensure all utilization aligns with Companies Act and SEBI guidelines for listed companies.
Audit Oversight: Premium transactions are subject to statutory audit scrutiny.
7. Conclusion
A Share Premium Account is a legal capital reserve created when shares are issued above face value. It strengthens the capital base but is strictly regulated in its utilization. Case laws emphasize that:
It is capital, not income
Cannot be used for dividends or unauthorized purposes
Can lawfully fund bonus shares, debenture redemption, or preliminary expense write-offs
Proper accounting and compliance ensure legal, financial, and investor confidence.
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