A company is said to be issued share at a premium when it
issues shares at a price above par or above nominal value. The company act 2013
does not impose any restriction on issue of share at premium. But the company
act 2013 does impose restriction on use of such premium.
According to sec 52(1) when a company issues share at a
premium, whether for cash or otherwise, a sum equal to the aggregate amount of
such premium shall be transferred to separate account “securities premium
account” .
In
accordance with the provision of section 52(2) of the Act, the securities
premium can be utilized only for the following purposes:
1. Issuing fully paid bonus shares to
members.
2. Write off the balances of preliminary
expenses of the company.
3. Writing off commission paid or discount
allowed or the expenses incurred on issue of share or debentures of the
company.
4. Payment of premium on redemption of
redeemable preference shares or debenture at a premium.
5. Buy back its own share or other
securities.
Premium collected on shares does not
give the share holder any preferential rights in case of winding up. The
security premium account can not be treated as free reserve. It is treated as
capital reserve and shown under the head “Reserve & surplus” of the balance
sheet. It can be used for limited purpose as stated above.
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