Issue of Shares at a Premium
It is quite common for the shares of financially strong and well-managed companies to be issued at a premium, i.e. at an amount more than the nominal or par value of shares. Thus, when a share of the nominal value of Rs. 100 is issued at Rs. 105, it is said to have been issued at a premium of 5 percent.
When the issue of shares is at a premium, the amount of share premium may technically be called at any stage of the issue of shares. However, premium is generally called with the amount due on allotment of shares, sometimes with the application money and rarely with the call money. The premium amount is credited to a separate account called ‘Securities Premium Account’ and is shown on the liabilities side of the company’s balance sheet under the heading ‘Reserves and Surpluses’. Share Premium amount can be used only for the following four purposes as laid down by Section 78 of The Companies Act 1956:
- (a) to issue fully paid bonus shares to an extent not exceeding unissued share capital of the company;
- (b) to write-off preliminary expenses of the company;
- (c) to write-off the expenses of, or commission paid, or discount allowed on any of the shares or debentures of the company; and
- (d) to pay premium on the redemption of preference shares or debentures of the company.
Issue of Shares at a Discount
There are instances when the shares of a company are issued at a discount, i.e. at an amount less than the nominal or par value of shares, the difference between the nominal value and issue price representing discount on the issue of shares.
For example, when a share of the nominal value of Rs. 100 is issued at Rs. 98, it is said to have been issued at a discount of two percent. As a general rule, a company cannot normally issue shares at a discount. It can do so only in cases such as ‘reissue of forfeited shares’ and in accordance with the provisions of section 79 of The Companies Act. It states that, a company is permitted to issue shares at a discount provided the following conditions are satisfied:
- (a) The issue of shares at a discount is authorised by an ordinary resolution passed by the company at its general meeting and sanctioned by the Company Law Board now Central Government.
- (b) The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10 per cent of the nominal value of shares. The rate of discount can be more than 10 per cent if the Government is convinced that a higher rate is called-for under special circumstances of a case.
- (c) At least one year must have elapse since the date on which the company became entitled to commence the business.
- (d) The shares are of a class which has already been issued.
- (e) The shares issued within two months from the date of receiving sanction for the same from the Government or within such extended period as the Government may allow.
- (f) If the offer prospectus at the date of issue must mention particulars of the discount allowed on the issue of shares.
Whenever shares are issued at a discount, the amount of discount is brought into the books at the time of allotment by debiting an account called ‘Discount on the Issue of Shares Account’, having a debit balance, denotes a loss to the company and is shown on the asset side of the company’s balance sheet under heading ‘Miscellaneous Expenditure’.
It is written-off by being charging it to the Securities Premium Account if any and, in its absence, by being gradually charged to the Profit and Loss Account over a period of 5 to 10 years.
