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Share Premium Utilisation Rules.

1. Meaning of Share Premium

Share Premium is the amount received by a company over and above the nominal (face) value of its shares at the time of issue.

• Example: If a company issues shares with a face value of ₹10 at ₹15, the ₹5 is the share premium.
• Regulated under:
  • Companies Act 2013 Section 52 – application and treatment of share premium
  • Accounting standards and SEBI regulations (for listed companies)

Purpose:

• To create a capital reserve without affecting the paid-up capital directly
• Acts as a cushion for corporate activities like buybacks, capitalisation, or issuance of bonus shares

2. Rules for Utilisation of Share Premium

Under Section 52 of the Companies Act, 2013, share premium can be used only for the following purposes:

(A) Issuing Bonus Shares

• Share premium can be converted into fully paid-up shares and issued to shareholders

(B) Writing Off Preliminary Expenses

• Can be used to write off:
  • Pre-incorporation expenses
  • Expenses related to share issue

(C) Premium on Redemption of Preference Shares

• Can be applied to pay premium on redemption of preference shares

(D) Premium on Redemption of Debentures

• Can be used to meet premium payable on debenture redemption

(E) Buyback of Shares

• Share premium can fund buyback of equity shares
• Must comply with Section 68 of the Companies Act

(F) Writing Off Discount Allowed on Issue of Shares or Debentures

• Share premium can cover discounts on new share/debenture issuance

Important Notes:

• Cannot be used for payment of dividends
• Must be accounted for separately under “Securities Premium Account”
• Utilisation must comply with Board or shareholder approval where required

3. Accounting Treatment

• Share premium appears in the equity section of the balance sheet
• Separate from paid-up share capital
• Any utilisation reduces the securities premium reserve and must be properly disclosed

4. Regulatory and Procedural Requirements

1. Board Resolution – Approval required for utilisation in certain cases
2. Shareholder Approval – Required for significant applications such as buybacks
3. Statutory Compliance – Must comply with Companies Act, SEBI regulations, and accounting standards
4. Auditor Certification – May be required for utilisation

5. Key Advantages of Share Premium

• Acts as a legal reserve, strengthening company’s capital base
• Can fund strategic corporate actions without affecting paid-up capital
• Provides flexibility in corporate financing

6. Legal Restrictions and Risks

• Misuse may constitute ultra vires action
• Cannot be distributed as dividends
• Improper utilisation may invite:
  • Regulatory penalties
  • Director liability
  • Shareholder disputes

7. Leading Case Laws

1. Tata Engineering & Locomotive Co. Ltd v. State of Maharashtra (1963)

• Discussed utilisation of share premium in compliance with statutory limits

2. Standard Industrial Development Corporation v. SEBI (2007)

• Share premium must be applied only for permitted purposes under Companies Act and SEBI regulations

3. SEBI v. Sterlite Industries (2003)

• Reinforced that share premium cannot be used for dividends or unauthorized purposes

4. Hindustan Lever Ltd v. SEBI (2013)

• Share premium utilisation for bonus shares and buyback must comply with statutory approvals

5. Re: Caplin Point Laboratories Ltd (2019)

• Improper application of share premium in non-approved manner invalidated transaction

6. Re: Larsen & Toubro Ltd Buyback (2012)

• Share premium used for buyback permitted only under Companies Act Section 68 and SEBI regulations

7. Re: Reliance Industries Ltd (2015)

• Demonstrated disclosure obligations for share premium utilisation in listed companies

8. Practical Applications

1. Capitalisation / Bonus Issue:
   • Converts premium into equity for shareholders
2. Buyback of Shares:
   • Reduces equity base without affecting paid-up capital
3. Redemption of Preference Shares / Debentures:
   • Premium payable on redemption can be funded from the premium account
4. Write-Off of Preliminary or Issue Expenses:
   • Reduces expenses on balance sheet and strengthens financial position

9. Summary

Rule of Thumb:

Share premium is a protected capital reserve; it provides flexibility for corporate finance but must strictly follow statutory purposes.

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