04 April 2013
Experts pls explain that if one wants to incorporate private limited company than what is the benifit of issuing shares at premium ? Can one wants to incorporate company at 100000 capital can issue share at Rs. 10 and premium Rs. 40 ?
What is the benifit of it at companys and shareholders point of view in doing that?
25 July 2025
Great question! Here's a clear explanation about **issuing shares at a premium** during incorporation of a private limited company:
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### 1️⃣ Can a company issue shares at a premium during incorporation?
**Yes.** When a company is incorporated, it can issue shares at a face value plus a premium. For example:
* Face value = Rs. 10 per share * Premium = Rs. 40 per share * Issue price = Rs. 50 per share
If the authorized capital is Rs. 1,00,000 (say 10,000 shares of Rs. 10 each), the company can issue shares at Rs. 50 each to raise a higher amount.
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### 2️⃣ What are the benefits of issuing shares at a premium?
#### Benefits for the Company:
* **More Capital without Increasing Share Capital:** The company gets extra funds (premium) over and above the face value. This premium goes into a separate account called **“Securities Premium Account”** (Section 52, Companies Act 2013).
* **Use of Securities Premium Fund:** The premium amount can be used for specified purposes such as:
* Issuing fully paid bonus shares to shareholders * Writing off preliminary expenses * Writing off expenses on issue of shares or debentures * Buying back shares * Providing for premium on redemption of preference shares or debentures
* **Strengthens Financial Position:** The premium helps improve the company’s net worth without increasing the number of shares or face value, which can be good for creditworthiness.
#### Benefits for Shareholders:
* **Value Perception:** Shares issued at a premium may reflect the perceived value of the company above the nominal value, indicating growth potential.
* **Protection Against Dilution:** Issuing at a premium can avoid dilution of shareholding at face value.
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### 3️⃣ Any regulatory considerations?
* **Minimum Subscription:** Company must receive minimum subscription (usually 90% of the issue) before allotment.
* **Disclosure in MOA/AOA:** The authorized share capital and the face value per share must be mentioned in the Memorandum of Association (MOA).
* **Accounting Treatment:** Premium received is credited to Securities Premium Account, a part of reserves and surplus in the balance sheet.
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### Summary Example:
| Particulars | Value (Rs.) | | --------------------------- | ----------------------------------- | | Authorized Share Capital | 10,000 shares @ Rs. 10 | | Issue Price per Share | Rs. 50 (Face Rs.10 + Premium Rs.40) | | Amount Received | Rs. 5,00,000 | | Face Value Amount Credited | Rs. 1,00,000 | | Securities Premium Credited | Rs. 4,00,000 |
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If you want, I can also explain how this impacts taxation or compliance or draft sample MOA clauses for shares issued at premium.
CAclubindia
