concept of premium in share issue

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CA Manish K Dhoot

CA B. Com NCFM CPCM

5015 Points Joined February 2008

What is the concept of premium?

Generally, most of the 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 say 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:

􀂄 The promoter company has a three years consistent

record of profitable working.

􀂄 The promoter takes up at least 50 per cent of the shares

in the issue.

􀂄 All parties applying to the issue should be offered the same instrument at the same terms, especially regarding the premium.

􀂄 The prospectus should provide justification for the proposed premium. On the other hand, existing companies can make a premium issue without the above restrictions.

Replies (3)

CA Manish K Dhoot

CA B. Com NCFM CPCM

5015 Points Joined February 2008

Why do companies make premium issues?

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 crore by way of shares say at a premium of Rs.90 per share increases its equity by only Rs.10 crore, which is easier to serve with an investment of Rs.100 crore. Thus, the companies seek to make premium issues. 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.

common stock (and sometimes preferred stock) issued and paid plus capital surplus represent the total amount actually paid by investors for shares when issued (assuming no subsequent adjustments or changes).

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Ramalingam K

Founder & Director - Holistic Investment

21077 Points Joined October 2011

The unpleasant reality about “Return of Premium in Term Insurance Plan”

What is a Term Insurance Plan?

Term Plan Life Insurance is a plan in which a person takes a life cover and pays a premium for the period of cover. The premium is usually paid annually, however other options as half-yearly and quarterly premium are also available.

https://holisticinvestment.in/blog/return-of-premium-term-insurance-plan/

Regards

Ramalingam K, MBA, CFP,

Director and Chief Financial Planner,

Holistic Investment Planners

“Best Performing Financial Advisor Award” Winners from CNBC TV18

www.holisticinvestment.in