Sec 78 of Companies Act

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This query is : Resolved

CA BIREN SHAH (Querist)

21 August 2010 A Company (immaterial whether private or public)issue shares at premium.Now if company use this premium for purchase of capital assets say fixed assets like building,plant machinery or use premium for investment in equity shares of other co.,or invest in mutual funds.
Q Whether Company can do this?
Q whether Company attract Sec 78 of Companies Act?

Ankur Garg

Ankur Garg (Expert)

21 August 2010 There are many different ways this premium account can be used. I will list few of them in very common language.

1. Company pays bonus shares and/or options to many employees or services provided to the company. These bonus shares and options are paid from premium share account;

2. Use it to balance out or writing off company’s expenses in issuing IPO;

3. Use it to balance out or writing off commission paid for marketing expenses of IPOs;

4. Use it to balance out or writing off discounts allowed to any issue of shares or debentures of the company;

5. Use the money for share buy back;

6. Use the money to fund growth and expansion for the company;

Keeping in view the above uses this premium can not be used for capital investment.

Views of other experts solicited.

Regards

CA BIREN SHAH

CA BIREN SHAH (Querist)

21 August 2010 if a company say reliance come up with an ipo. and these types of big companies are issuing shares at premium.
Q whether they can only use this premium for the above mentioned purpose or can use any where alse?

n pls dont give status of resolved to the QUESTION

POOJA SACHDEVA

POOJA SACHDEVA (Expert)

22 August 2010 Dear Author

According of Sec 78 of the companies act 1956 ,the securities premium may be applied only for the purpose :
1 to issue fully paid bonus shares to the members
2 to write off preliminary expenses of the company
3 to write off the expenses of or commission paid or discount allowed on any issue of shares or debentures of the company
4 To provide for the premium payable on the redemption of any debenture of the company.

if big wants to invest these money in capital exp. i will be wrong

Regards

Pooja

CA BIREN SHAH

CA BIREN SHAH (Querist)

23 August 2010 sorry but pls be precise.... n dont give the status of resolved..

Ankur Garg

Ankur Garg (Expert)

25 August 2010 Keeping in view the above uses this premium can not be used for capital investment.

Regards

Rasesh

Rasesh (Expert)

27 August 2010 The amount (money per se) can be used for any purpose / objective.

However, the amount lying to the credit of the account (Securities Premium Account) cannot be used for any purpose other than the purpose as stated in Sec 78. Any use of Securities Premium Account other than the above (Sec 78) will be construed as reduction in capital of the company and will require prior approval of members and High Court.

Keeping the theory aside and replying to your query precisely, the answer is:

1) Amount (money) can be used for buying any asset.

Accounting entry: Capital Asset - Dr
To Bank Account - Cr

2) Securities Premium Account cannot get reduced for any purpose other than those stated in Sec 78 or without members and high cort approval.

Hope the above satisfies your query completely. If not, i would be glad to respond.

Message likes : 3 times

CA BIREN SHAH

CA BIREN SHAH (Querist)

14 September 2010 thank you sir..

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