The share premium account is usually utilized to pay off equity expenses, which include underwriter fees. The account can also be used in the issuance of bonus shares and for costs or expenses related to this issuance.
The share premium account is a reserve account whose funds cannot be used for just any purpose. Instead, the funds in the share premium account can only be utilized for the purposes provided in the company’s bylaws, such as paying equity-raising expenses, or underwriting fees.
‘Securities Premium Reserve’ cannot be used as working capital. It can be used only for those purposes which are specified under section 52 of Companies Act, 2013.
The Companies Act 2006 allows a private company to utilise the share premium account and transfer this reserve to the profit and loss reserve, meaning it becomes distributable.
Share premium: Though , as per definition of ‘free reserves’ , share premium is not ‘free reserve‘ because dividend cannot be declared out of share premium. However, ‘share premium’ is considered just like free reserves for many of purposes as per specific provisions.
Provisions of Section 56(2)(viib) says that when a private limited company issues share at a price which is more than its Face Value then consideration receives in excess of Fair Market Value (FMV) is taxable under the head “Income From Other Source”.
As the NAV has been rising, the share premium on that particular sub fund has become negative due to large redemptions. The overall result is that the share premium is now showing a debit balance, in spite of credit balances on other sub funds, because of the very significant debit balance on the one sub fund.
You can reduce the share premium account to zero. You can also reduce the capital redemption reserves and redenomination reserve to zero. The capital can be paid back to the shareholders and must be repaid at par value. You cannot repay share capital at a premium or repay at less than the nominal value.
As the share premium reserve does not form part of distributable reverses, Company Law states that the company cannot declare a dividend despite having a positive cash balance.
Share Capital and Share Premium are major components of equity. The key difference between share capital and share premium is that while share capital is the equity generated through the issue of shares at face value, share premium is the value received for shares that exceed the face value.
A company issues its shares at a premium when the price at which it sells the shares is higher than their par value. This is quite common, since the par value is typically set at a minimal value, such as $0.01 per share. The amount of the premium is the difference between the par value and the selling price.
Can SPR be used for payment of dividend?
Amount of securities premium reserve cannot be distributed as dividend. It can only be used for the purposes listed under Section 52 of the Companies Act.