by Securities premium arises when a company issues shares at a price higher than their nominal or face value. For example, if a company issues a share of ₹10 at ₹15, the additional ₹5 is credited to the Securities Premium Account. This amount is not treated as ordinary revenue profit available for unrestricted distribution. Under Section 52 of the Companies Act, 2013, its utilisation is restricted to specified purposes. Companies must therefore record, maintain, and use securities premium in accordance with the applicable statutory provisions.
1. Legal Framework under Section 52
Section 52 of the Companies Act, 2013 governs the application of the securities premium account for companies to which the provision applies. It establishes that the premium received on issuing shares must be credited to a separate securities premium account and may be applied only for purposes permitted by law. The provision protects the capital-related funds of a company from being used as though they were ordinary operating profits. Compliance requires proper accounting records, appropriate authorisation, and verification that each proposed utilisation falls within the statutory permissions.
2. Statutory Purposes for Utilisation of Securities Premium
Section 52(2) permits companies to apply the securities premium account for specified purposes, including issuing fully paid bonus shares, writing off preliminary expenses, writing off eligible expenses or commission or discount connected with an issue of shares or debentures, providing for the premium payable on redemption of redeemable preference shares or debentures, and purchasing the company’s own shares or other securities under Section 68. These permissions are statutory exceptions to the general restriction on using the account.
3. Issue of Fully Paid Bonus Shares
A company may use its securities premium account to issue unissued shares to its existing members as fully paid bonus shares, subject to applicable legal requirements. This process converts an eligible balance into share capital without requiring shareholders to make an additional payment for those bonus shares. The company must follow the applicable provisions governing bonus issues, including Section 63 of the Companies Act, 2013, where relevant. The transaction must be properly authorised, recorded, and disclosed in the financial statements.
4. Writing Off Permitted Expenses
Section 52(2) allows the securities premium account to be used to write off the company’s preliminary expenses and specified expenses, commission, or discount associated with an issue of shares or debentures. This treatment must relate to the categories expressly permitted by the Act; it does not authorise the company to write off any ordinary operating expense from securities premium. Companies should maintain supporting invoices, agreements, and accounting records to demonstrate that the expenditure qualifies for statutory utilisation.
5. Providing for Redemption Premium
A company may apply securities premium towards the premium payable on redemption of redeemable preference shares or debentures, as permitted by Section 52(2). Redemption premium is the additional amount payable over the relevant nominal value when the securities are redeemed under their terms. The company must calculate the amount correctly, comply with the applicable redemption provisions, and record the adjustment appropriately. This statutory permission helps a company make provision for specified redemption obligations without treating securities premium as unrestricted distributable profit.
6. Purchase of Own Shares or Other Securities
Section 52(2) permits the use of securities premium for purchasing the company’s own shares or other securities under Section 68 of the Companies Act, 2013. Such a purchase, including a buy-back, must satisfy the applicable statutory conditions and procedural requirements. The company cannot rely on Section 52 alone to bypass the requirements of Section 68. Proper approvals, limits, documentation, and accounting entries must be observed to ensure that the transaction is lawful and accurately reflected in the company’s financial statements.
7. Special Provision for Certain Classes of Companies
Section 52(3) provides a separate set of permitted uses for prescribed classes of companies whose financial statements comply with the accounting standards prescribed under Section 133. For these qualifying companies, securities premium may be used to pay up unissued equity shares issued as fully paid bonus shares, write off specified expenses, commission, or discount connected with an issue of equity shares, and purchase the company’s own shares or other securities under Section 68. The special provision must be applied only when the company satisfies the prescribed eligibility conditions.
8. Accounting Records, Authorisation, and Disclosure
Strict compliance requires the company to maintain a clear record of the premium received on each share issue and every subsequent utilisation. Before using the balance, management should identify the relevant statutory permission, verify eligibility, obtain the required corporate approvals, and preserve supporting documentation. The accounting entries should distinguish securities premium from share capital and ordinary revenue. The company must also disclose relevant balances and movements in its financial statements according to the applicable reporting framework. These procedures support audit verification, regulatory compliance, and accountability to shareholders.
9. Consequences of Improper Utilisation
Using securities premium for a purpose not permitted by Section 52 may constitute non-compliance with the Companies Act, 2013. The transaction may require correction, and the company and responsible officers may face legal or regulatory consequences depending on the facts and applicable provisions. Improper utilisation can also lead to accounting misstatements, audit qualifications, and reduced investor confidence. Companies should therefore avoid treating the securities premium account as a general reserve available for unrestricted business expenditure. Where a proposed use is uncertain, professional advice should be obtained before the transaction is approved or recorded.
