Securities Premium Account

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Securities Premium Account
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Introduction to Securities Premium Account

• The object of Section 78 of the 1956 Act was to
  lay down specifically how the securities premium
  accounts collected on the issue of shares should
  be utilized. The expression premium is not
  defined. It may be that if, over and above the
  cash payment on the shares, some further
  advantage measurable in terms of money is
  conferred on the company the value of such
  advantage will have to be regarded, as in the
  nature of a securities premium. A company is not
  bound to issue shares at a premium.
  A company proposed to issue further shares under
  section 81 of the 1956 Act and offer them at a
  securities premium. A preference shareholder
  filed a suit for a declaration that
  the company was a public company. The issue
  raised was placed before the management of
  the company because of an interim order passed in
  the suit. The equity shareholder with majority
  shareholding opposed the proposed issue of shares
  during pendency of suit. The court found that the
  valuation of shares was not shown to be
  artificial or exaggerated. The court said that
  the equity shareholder could subscribe to such
  share to maintain its holding. The issue of
  shares at a premium was not illegal.

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Business Registration
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Retention of share premium in a separate account

• Any share premium collected by a company on issue
  of shares is required to be retained in a
  individual account. This amount cannot be
  utilized for any purpose, other than the ones
  specified in Sub-section(2) of Section 78 of the
  1956 Act. If the amount lying in the securities
  premium account is used for any other purposes,
  it would tantamount to reduction in share
  capital, attracting the provisions of Section 66
  of the 1956 Act. It may be noted that section 52
  of the 2013 Act calls for transfer of premium
  collected on shares to securities premium
  account. While both equity and preference shares
  may be issued at premium, generally only
  convertible debentures are issued at a premium.
  Section 52 of the 2013 Act is not attracted where
  the convertible debentures are issued at premium
  and are convertible at par. In such cases, the
  premium collected is either transferred to profit
  and loss account or amortized over the term of
  debentures. However, in cases where the
  debentures are issued at par, but are convertible
  at a premium, such premium is transferred
  to securities premium account, and the section id
  attracted.

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Application of the Securities Premium Account

• The securities premium account may be applied for
  the following purposes-
• The paying up of fully paid bonus shares to be
  issued by the company to its members
• The writing-off of preliminary expenses of
  the business registration
• The writing-off of the expenses of, or commission
  paid or discount allowed on, any issue of shares
  or debentures of the company
• The providing of a premium payable by
  the company on redemption of redeemable shares or
  redemption of shares or debentures of
  the company. However, under the 2013 Act this is
  subject to the provisions of Section 55(2) of the
  2013 Act, which allows use of securities premium
  account to provide for premium on redemption of
  preference shares in certain cases only for
  redemption of preference shares issued prior to
  commencement of the 2013 Act.
• Purchase of its own Securities or other required
  securities in terms of section 77A of the 1956
  Act

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Business Registration
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Nature of Securities Premium Account

• Share premium is a new class of capital of
  a company which is quasi-share capital but not
  distributable as income any more than any other
  capital asset. On a winding up the surplus monies
  in the share premium account will be returned  to
  the shareholders as capital and so as long as
  the company is going concern. The same monies can
  never be returned to the shareholders except
  through the median of a reduction notice or, in
  other words, except under exactly the same
  requirements as those under which any other
  capital asset can reach the shareholders hands.
  Another effect of the section is that
  distribution of share ( now Securities) premium
  amount as dividend is not permitted. But premium
  received on the issue of shares, under the 1913
  Act, were profits and so distributed as dividends.

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Reduction of securities premium account

• The court has a discretion whether or not to
  conform a reduction of a share (now securities)
  account and would normally to do so where
• The shareholders are treated equally
• The reduction proposals are properly explained
• The creditors are safeguarded
• The reduction is for a discernible purpose.
• On the facts , the first two tests were
  satisfied. There were no danger to creditors
  since the use of the reserve created in the
  consolidated account by the reduction in the
  share(Securities) premium account to write-off
  the goodwill in the consolidated accounts would
  not affect the creditors of the underlying
  companies since they were the creditors of a
  particular company and not of the group. The
  undertakings given to the court protected the
  creditors in the parent company whose securities
  premium account was being reduced. The fourth
  test was also satisfied since the purpose of the
  reduction was to create a reserve against which
  the goodwill arising in the future on the
  consolidation of the accounts could properly be
  set-off.

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Business Registration
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Writing off Accumulated losses by utilizing
share(Securities) premium account

• The company proposed to write-off accumulated
  losses by utilizing the share premium account and
  by reducing the face value of the shares. The
  need and purpose of reduction was duly explained
  and discussed at an extraordinary general meeting
  of the company at which a special resolution was
  unanimously passed. The company had no creditors.
  The unsecured creditors had given their written
  consent. Nothing was shown to be there either
  against public interest or against law. The court
  allowed the proposed reduction. The share premium
  account is treated as paid up share capital for a
  limited purpose. But, it cannot be treated as a
  ordered fund. A company cannot write-off its
  losses against share (Securities) premium account
  unless there is a legal permission to that
  effect. A company can be allowed to write-off, or
  adjust a loss against share(now securities) premiu
  m account if there is no diminution of the share
  capital account.

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Reduction of Securities Premium Account for
issuing bonus shares

• The articles of the business registration permitte
  d the securities premium account and Capital
  Redemption Reserve fund to be applied for paying
  up the unissued shares to members as fully paid
  bonus shares. The proposed reduction of capital
  neither involved diminution of liability in
  respect of unpaid capital, or payment to any
  shareholder of paid up capital. The court
  permitted the company to dispense with the
  procedural requirements of section 101(2) and
  approved the reduction.

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Appropriation of Securities Premium Amount

• Application of the amount in the premium account
  for any purpose other than those indicated in the
  section has been held to be not allowable.
  The company was attempting to wipe out losses
  incurred in investment in securities of
  other companies by taking-off the money from the
  premium account and reducing it accordingly. The
  Court did not permit it.

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Bonus issue by capitalization of share premium
account

• Bonus shares were issued by capitalization of the
  share (Securities) premium account. The issue was
  made without the authority of an ordinary
  resolution of the company. Further, the shares in
  respect of which bonus shares were not fully
  paid-up. This was held to be a mistake. The issue
  was void. It could not be regularized by the fact
  of informal agreement between the shareholders.
  Nor it could be said that the allottees of such
  shares were dealing with the company in good
  faith from outside so as to come within the
  protective scope of section 35A of the English
  Companies Act,1985.Talking to the essential
  nature of the bonus issue , the Court of Appeal
  said that profits and other available reserves
  are capitalized and applied to paying up unissued
  shares or debentures which were then issued to
  the existing shareholders in proportion to their
  entitlement to dividends. The defendants in this
  case, in failing to act with the authority of an
  ordinary resolution and issuing bonus to
  shareholders whose shares (Securities) were not
  paid up, had the effect that the directors had no
  power to capitalize any sum standing to the
  credit of the share( Securities)  premium account
  or to appreciate it to members.

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Cancellation of Securities Premium Account

• In a New Zealand case the company sought
  conformation by the information of the special
  resolution to issue  from time to time
  its securities premium account to its ordinary
  shareholders. The directors were to transfer from
  the revenue reserves to a special capital
  replacement fund an amount equal to the amount to
  be distributed. That fund was not to be available
  for payment of dividend nor to be distributed to
  shareholders, but could be applied in paying up
  unissued shares as fully paid bonus. No
  objections had been obtained from the creditors.
  The sundry trade creditors had been regularly
  paid. The Court said that the issued and
  distribution of the securities premium account is
  equal to an actual return of the paid-up capital
  and can only be made in precisely same way as a
  reduction of capital. The motives of
  the business registration enabling it to
  distribute dividends in part tax free in the
  hands of shareholders did not affect confirmation
  by the Court. Where there is a evidence of the
  companys intention to pay its tax and its
  creditors, other than the monthly trade
  creditors, Consent to the reduction and
  the company is solvent, these are called 
  Special circumstances in which the court may
  dispense with the provisions of the Act. The
  Court may dispense with an inquiry as to
  creditors on condition that a fund is held for
  their payment.

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Business Registration
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Reduction of securities premium account for tax
payment

• The business registration is carried out under
  section 78 of the 1956 Act for reduction of share
  (Securities) premium account for the purpose of
  meeting deferred tax liability. Shareholders had
  approved the reduction by a resolution. In
  keeping the order of the High Court a public
  notice was published for inviting objection was
  received. Reduction of the account was
  accordingly confirmed.

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Reduction of premium per securities

• A Company issued and distributed the convertible
  debentures. The conversion was to be at a stated
  rate of premiums. The market value of the shares
  was below the premium amount. The company passed
  a resolution for cancellation of the premium
  amount which was to be collected with the third
  and the final call. The objecting creditors
  interest was secured and safe by making deposit
  in the court. The resolution for reduction
  of securities was confirmed to be carried on.