Securities premium is the excess amount received by a company above the face value of its shares when issued. Under Section 52 of the Companies Act 2013, it must be held in a Securities Premium Account and can only be used for specified purposes like issuing bonus shares, writing off preliminary expenses, or share buybacks—not for dividends.
Securities Premium Under Companies Act: What It Is and How It Can Be Used
Securities premium (also called share premium) is the excess amount a company receives above the face value (par value) of its shares when they are issued. For example, if a company issues shares with a face value of Rs 10 at Rs 250 per share, the Rs 240 difference per share is the securities premium. Under Section 52 of the Companies Act 2013, this premium is held in a special account and can be used only for specified purposes.
- Securities premium = issue price minus face value per share
- Credited to Securities Premium Account — a capital reserve on the balance sheet
- Cannot be distributed as dividend
- Permitted uses: fully paid bonus shares, writing off preliminary expenses, writing off discount on debentures, share buyback premium, redemption premium on preference shares
- Private companies using Ind AS can also use it under Section 52 (2)(e) for other purposes per NCLT order
What Is Securities Premium and How Is It Calculated?
When a company issues equity shares at a price higher than their face (nominal) value, the excess is called securities premium. This commonly occurs during:
- Initial Public Offerings (IPOs) where market demand prices shares above face value
- Preferential allotments to private equity or strategic investors
- Rights issues priced above face value
- Employee Stock Option Plans (ESOPs) exercises above face value
Example: A startup issues 10,000 shares of face value Rs 10 at Rs 500 per share to a VC firm.
- Total proceeds: Rs 50,00,000
- Share capital credit (10,000 × Rs 10): Rs 1,00,000
- Securities Premium Account credit (10,000 × Rs 490): Rs 49,00,000
How Is Securities Premium Shown in the Balance Sheet?
The Securities Premium Account is shown under Shareholders’ Funds → Reserves and Surplus in the balance sheet (Schedule III format). It is a capital reserve, not a revenue reserve. This classification means it represents real inflows to the company from investors — not profits earned through operations.
| Balance Sheet Head | Sub-Head | Nature |
|---|---|---|
| Shareholders’ Funds | Share Capital | Face value of all issued shares |
| Shareholders’ Funds | Reserves and Surplus → Securities Premium | Excess over face value on share issuance |
| Shareholders’ Funds | Reserves and Surplus → Retained Earnings | Accumulated operating profits |
What Are the Permitted Uses of Securities Premium Under Section 52?
Section 52(2) of the Companies Act 2013 strictly limits how the Securities Premium Account may be applied:
| Permitted Use | Section 52(2) Clause |
|---|---|
| Issue of fully paid bonus shares to existing shareholders | 52(2)(a) |
| Writing off preliminary expenses (company formation costs) | 52(2)(b) |
| Writing off expenses of issue of shares or debentures | 52(2)(b) |
| Writing off discount on issue of shares or debentures | 52(2)(b) |
| Premium on redemption of redeemable preference shares or debentures | 52(2)(c) |
| Buyback of company’s own shares (premium portion of buyback price) | 68/52 read together |
What Is the Difference Between Securities Premium and Capital Reserve?
| Aspect | Securities Premium | Capital Reserve |
|---|---|---|
| Source | Excess over face value on share issuance | Capital profit (e.g., revaluation of assets, profit on forfeiture) |
| Specific law | Section 52, Companies Act 2013 | No specific section; general restriction applies |
| Use for dividends | Not permitted | Not permitted |
| Bonus shares | Can fund bonus shares | Can fund bonus shares |
What Happens to Securities Premium When Shares Are Bought Back?
Under Section 68 of the Companies Act 2013, a company can buy back its own shares using the Securities Premium Account to the extent of the premium component of the buyback price. The Capital Redemption Reserve (CRR) must be created equal to the nominal value of shares bought back, using free reserves or the securities premium account.
For example: If a company buys back 1,000 shares at Rs 150 each (face value Rs 10), the Rs 10,000 nominal value goes to CRR, and Rs 1,40,000 (the premium portion) comes from the Securities Premium Account or free reserves — subject to buyback limits (maximum 25% of paid-up capital in a year).
Is Securities Premium Taxable as Income?
No — securities premium received by a company is not treated as income under the Income Tax Act. It is a capital receipt. However, SEBI (for listed companies) and the Income Tax Act have specific valuation rules to prevent companies from issuing shares at inflated premiums to evade tax. Under Section 56(2)(viib) of the Income Tax Act, if a closely held company issues shares at a price exceeding the Fair Market Value (FMV) determined as per the prescribed method, the excess is treated as income from other sources in the hands of the issuing company.
Frequently Asked Questions
Securities premium is the amount received by a company above the face value of its shares during a share issue. It is credited to the Securities Premium Account under Reserves and Surplus in the balance sheet.
No. Securities premium is a capital account and cannot be distributed as dividend to shareholders. Using it for dividends violates Section 52 of the Companies Act 2013.
Issuing fully paid bonus shares, writing off preliminary expenses, writing off share/debenture issue discount/expenses, premium on preference share/debenture redemption, and share buyback premium.
Generally not — it is a capital receipt. However, if shares are issued above Fair Market Value to a closely held company, the excess may be taxed as income under Section 56(2)(viib) of the Income Tax Act.
Under Shareholders’ Funds → Reserves and Surplus → Securities Premium Account. It is a capital reserve shown separately from retained earnings.
CA Madhusmita Padal is a Practicing Chartered Accountant with firms based in Odisha and Chennai. She specializes in taxation, company law, and auditing. She is passionate about simplifying complex concepts and making knowledge accessible to all.