Hi Generally, most shares have a face value (i.e. the value as in a balance sheet) of Rs.10 though not always offered to the public at this price. Companies can offer a share with a face value of Rs.10 to the public at a higher price. The difference between the offer price and the face value is called the premium. As per the SEBI guidelines, new companies can offer shares to the public at a premium provided : 1.The promoter company has a 3 years consistent record of profitable working. 2.The promoter takes up at least 50 per cent of the shares in the issue. 3.All parties applying to the issue should be offered the same instrument at the same terms, especially regarding the premium.
4.The propectus should provide justification for the propose premium. On the other hand, exisiting companies can make a premium issue without the above restrictions. A company’s aim is to raise money and simultaneously serve the equity capital. As far as accounting is concerned, premium is credited to reserves and surplus and it does not increase the equity. Therefore, a company which raises Rs.100 crores by way of shares at say Rs.90 premium per share increases its equity by only Rs.10 crores, which is easier to service with an investment of Rs.100 crores. Thus the companies seek to make premium issues. As well shall see later, a premium issue can increase the book value without decreasing the EPS. In a buoyant stock market when good shares trade at very high prices, companies realize that it’s easy to command a high premium. Section 79 of the Companies Act, 1956 deal with the application of securities premium received on issue of shares.
Issue of shares at premium A company may issue shares at a premium i.e. at a value above its par value. The following conditions must be satisfied in connection with the issue of shares at a premium:-
The amount of premium must be transfered to an account to be called share premium account. The provisions of this Act relating to the reduction of share capital of the company will apply as if the share account premium account were paid up share capital of the company.
Share premium account can be used only for the following purposes :-
In issuing fully paid bonus shares to members.
In Writing off preliminary expenses of the company.
In writing off public issue expenses such as underwriting commission, advertisement expenses, etc
In providing for the premium payable paid on redemption of any redeemable preference shares or debentures.
In buying back its shares
Procedure for issue of shares at premium 1. Check Authorized capital, if insufficient, increase it. 2. Convene a Board meeting and approve the proposal for issue of share at premium specifying No. & nominal value of shares, Amt of Premium, other terms and conditions and draft Notice of General Meeting to pass special resolution. 3. In case of Listed entity, intimate to stock exchange. about the particulars of issue after board meeting 4. Despatch the notice of general meeting to memebers as well as stock exchange(3 copies) 5. Hold General meeting pass special resolution & forward the proceeding to stock exchange. 6. File form 23 within 30 days. 7. Allot the shares in duly convened board meeting. 8. Note that premium sholud be received alongwith the applications. In case of NRI allottes, obtain RBI approval 9. Intimate to stock exchange about allotment. 10. Transfer premium amount received to "Securities premium account". 11. File form 2 with 30 days of allotment. 12. Issue the shares & make entry in Register of Members 13. Complete other formalities as may be required by stock exchange
Issue of Shares at Premium Issuance of shares at premium is th most prevalent mode of issue by reputed and well established companies. When shares of the face value of Rupees ten each are issued at price, which is greater than Rupees ten per share, it will be said that the issue is at premium. Section 78 of the Act, deal with application of premium received on issue of shares. Where a company issue shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premium on those shares shall be transferred to an account to be called “the share premium account” . The Securities premium account may be applied by the company: 1. In paying up un issued securities of the company to be issued to members of the company as fully paid bonus shares; 2. In writing of preliminary expenses of the company 3. In writing off of the expenses of, or the commission paid or discount allowedon, any issue of securities or debenture of the company; 4. In providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.
Procedure for issue of shares at premium:- 1. Call a Board Meeting for such issue and calling of general meeting for issue of shares at premium; 2. Serve notice of general meeting to all shareholders 3. Pass special resolution under section 81(1A) of the Companies Act, 1956; 4. File Form-23 with ROC within 30 days from the date of passing of resolution. 5. Call a Board Meeting for allotment of shares at premium. 6. File Form-2 with ROC within 30 days from the date of allotment.