A share premium account can be used to write off certain expenses, such as the cost of underwriting, commissions paid, and certain discounts. The accounts can also be used to issue bonus shares.
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.
Other Non-Current Liabilities:
General Reserve, Capital Reserve, Securities Premium, Forfeited Share Account, Dividend Equalization Fund, Sinking Fund, etc.
Share premium account may also be known as additional paid-in capital and can also be called paid-in capital in excess of par value. This account is a statutory and non-distributable reserve account. Share premium can be money received for the sale of either common or preferred stock.
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.
Ensure the company’s articles allow a capital reduction. All directors must sign a solvency statement. Shareholders must approve the capital reduction via a special resolution (needing 75% of the votes) within 15 days of the solvency statement date.
Utilising the share premium account.
|Balance sheet (before reduction)|
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.
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.
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”.
Section 618 (2) states that upon commencement of section 74, any amount standing ot the credit of a company’s share premium account and capital redemption reserve shall become part of the company’s share capital. … The above are essentially the options to convert the share premium account into share capital.
‘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.