The Companies Act stipulates a condition known as the Securities Premium that is relevant to the issuance of securities. Here’s everything you need to know about securities premiums under the Companies Act.
Introduction to Securities Premium
Under the Companies Act, the issuance of securities at a value surpassing their nominal worth triggers the imposition of Securities Premium. This provision mandates that the difference between the issued price and nominal value be designated as securities premium and maintained separately.
Definition and Parameters of Securities Premium
Securities premium denotes the variance between the nominal and offered values of securities. Companies have the option to engage in a premium issue, issuing securities above their nominal value, provided they adhere to the criteria specified by the Companies Act.
Capital Receipt and Tax Implications
Considered a capital receipt, securities premium enjoys exemption from income taxation. This grants companies the flexibility to utilize these funds exclusively for purposes linked to business expansion. Crucially, these funds cannot be distributed to company members in the form of dividends.
Attracting Investments through Premium Issues
Financially robust companies with substantial growth potential often attract investments in the form of cash and debt. These companies, esteemed by the public, can issue securities at a price significantly higher than their nominal value, resulting in what is known as a premium issue.
Significance of Fully Subscribed Premium Issues
A premium issue that is fully subscribed signifies the confidence of subscribers in the company. This indicates that the public is willing to pay a premium, demonstrating their belief in the company’s potential and value.
Permissible Uses Outlined by Section 52
Section 52 of the Companies Act delineates the acceptable applications of securities premiums. Emphasizing the prevention of non-capital utilization, this section aims to safeguard the capital base of company members. It ensures that funds derived from securities premiums are judiciously utilized for capital-related purposes, promoting responsible utilization and capital retention.
| In essence, the imposition of securities premium is a crucial aspect of the Companies Act, shaping the financial landscape of companies and influencing their capacity for expansion. Understanding its implications and adhering to the guidelines set by the Act is vital for companies seeking to leverage securities premium for strategic business growth. |
Premium Issue: Key considerations
Companies may trade their securities at a value exceeding their nominal face value, anticipating a heightened demand for these securities. In such scenarios, companies might opt to issue securities at multiples of the nominal value, especially if they are expected to be in high demand. Notably, companies making their initial Initial Public Offering (IPO) typically cannot opt for a premium issue.
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Conditions Set by the Companies Act for Premium Issuance
The Companies Act outlines specific conditions for the issuance of securities at a premium. Additionally, when a company repurchases its securities, it must adhere to buy-back provisions, as outlined in Section 68 of the Act.
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Buy-Back Provisions and Section 68 of the Companies Act
A buy-back arrangement enables a company to repurchase its securities and subsequently sell them at a price higher than the acquisition cost. Importantly, there is no price ceiling for the sale of repurchased securities, allowing companies to profit from this transaction.
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Final Sale Price and Listing on Stock Exchange
The board of directors determines the final sale price of securities, particularly if the company’s securities are listed on a recognized stock exchange in India. In such cases, the offer price should align reasonably with the Average Market Price (AMP), which is the six-month average trading price of the securities. The calculation of AMP considers the total trading volume across all recognized exchanges, with the six-month period starting from the date the offer is announced.
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Disclosure Requirements in Offer Document
The offer document for the securities issuance must include pricing justification and the methodology used for price calculation. However, it’s worth noting that the requirement to disclose the calculation technique is not applicable in the case of a private placement of securities.
Allotment for Non-cash Consideration
In the course of business transactions, a corporation may engage in agreements—whether written or verbal—to acquire goods or services. The settlement for such agreements may involve non-cash payments. In scenarios where non-cash consideration is employed, the corporation has the option to issue securities to fulfill the payment. The prescribed procedure for determining the amount of securities premium in such cases is outlined below:
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Assessment of Securities Allocated
Evaluate the total number of securities allocated to the contractor.
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Calculation of Nominal Value
Multiply the total number of securities by the nominal value of each security to obtain the overall nominal value of the securities allocated.
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Consideration of Contract Value
Consider the overall value of the contract. Utilize the sum mentioned in the contractor’s invoice for value calculation. If there are multiple invoices, assess the total value collectively.
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Calculation of Securities Premium
Examine the difference between the total value of the contract and the aggregate nominal value of the securities. This difference constitutes the securities premium.
Adhering to this systematic approach ensures a transparent and standardized process for determining securities premium when non-cash consideration is involved in business agreements.
Capital Treatment of Securities Premium: Key Pointers
The securities premium holds a status equivalent to the company’s paid-up capital, thereby subjecting it to the same regulations governing capital reduction as outlined in the Act. In situations where a company undergoes a capital reduction exercise, the securities premium must be proportionally decreased to align with the capital reduction.
Here are some additional considerations
- When adjustments to the balance in the securities premium account are necessary, adherence to the company’s Articles of Company is imperative. Any modification in the securities premium requires enforcement in accordance with these articles.
- Reductions in securities premium find approval when aimed at offsetting losses resulting from securities trading. Additionally, the account balance can be utilized to settle deferred tax liabilities.
- While securities premiums can offset accumulated losses on the asset side of the balance sheet, the approval of such adjustments requires a resolution passed by the members. This resolution necessitates an extraordinary general meeting (EGM) for member authentication, along with consent from the company’s lenders. Importantly, a reduction in securities premium is permissible only when accompanied by a decrease in capital.
- Given its categorization as a capital amount, securities premiums cannot be utilized for dividend distribution. However, the Companies Act does permit the issuance of bonus shares from the securities premium, subject to approval by the company’s members. The issuance of bonus shares requires a resolution passed by the members, with the caveat that such shares should not be allotted to holders of partially paid securities.
Usage of Securities Premium
According to Section 52, the Securities Premium can be employed for various purposes, including:
- Issuing fully paid bonus share capital.
- Covering initial expenses incurred by the company.
- Meeting costs, commissions, or discounts associated with previously issued securities.
- Ensuring the availability of premium for the redemption of the company’s redeemable debentures or preference share capital.
- Funding plans or executing securities buybacks in compliance with Section 68 of the Companies Act.
Conclusion
The issuance of securities at a premium comes with certain limitations in its utilization. Firstly, it cannot be treated as a benefit and, consequently, cannot be distributed as profits. Additionally, the premium, whether in cash or in kind, must be maintained in a separate record known as the securities premium account. Furthermore, the share premium is held with a similar sanctity as the share capital.
Reductions in the securities premium account are permissible only with the approval of the Articles of Association and must be executed like the reduction of share capital. While the securities premium account cannot be treated as a profit for distribution, it may be utilized for distributing bonus shares. Notably, the 2013 Companies Act has introduced specific provisions for certain categories of companies.
For legal advice or assistance on this matter, feel free to reach out to the legal professionals at Vakilsearch.
FAQs on Companies Act
What is securities premium account under Companies Act, 2013?
The Securities Premium Account under the Companies Act, 2013, represents the excess amount received from issuing shares above their face value. It cannot be distributed as dividends but can be used for various purposes like writing off expenses or issuing bonus shares.
What is the Companies Act share premium account?
The Companies Act Share Premium Account refers to the account where the excess amount received on the issuance of shares is recorded. It’s utilised for specific purposes outlined in the Act, like writing off preliminary expenses or issuing bonus shares.
What is the formula of a securities premium account?
The formula for Securities Premium Account is straightforward: it’s the excess received from issuing shares over their face value. Simply put, it's the amount received minus the nominal value of shares issued, resulting in the premium.
What is Section 62 of the Companies Act 2013?
Section 62 of the Companies Act 2013 deals with provisions related to further issuance of share capital by a company, specifying conditions, procedures, and shareholders' approval required for such issuances.
What is Section 42 and 62 of the Companies Act?
Sections 42 and 62 of the Companies Act pertain to different aspects. Section 42 covers private placements of shares and securities, specifying rules and compliances, while Section 62 deals with further issuances of share capital, including rights issues, bonus shares, etc.
What are Sections 42 and 62 of the Companies Act 2013?
Sections 42 and 62 of the Companies Act 2013 cover distinct areas. Section 42 focuses on private placements, outlining procedures and requirements, whereas Section 62 deals with conditions and procedures for further issuances of share capital by companies.
