Section 2(57) of the Companies Act, 2013 builds net worth from paid-up share capital, all reserves created out of profits, the securities premium account and the credit balance of the profit and loss account. It then deducts accumulated losses, deferred expenditure and miscellaneous expenditure not written off. The premium is named in that list, so it forms part of the figure a CA certifies for a company net worth certificate under Section 2(57).
Net Worth & Solvency Glossary · Entity Finance
Securities Premium and a Company's Certified Net Worth
noun · also "securities premium account", "securities premium reserve": the same balance
Definition
Securities premium is the amount a company receives when it issues shares for more than their face value.
The face value goes to share capital, and the excess is credited to a separate securities premium account.
One share issue, two accounts
A ₹10 share issued for ₹100
- ₹10 face value
- Share capital
- ₹90 the excess
- Securities premium account
- Where it came from
- Shareholders contributed it. The company did not earn it by trading.
- Where it sits
- On the equity side, as a line of its own within reserves.
- What it is not
- Not a free reserve, not distributable profit, not the line headed "capital reserve".
On a share issue
01What securities premium represents on a share issue
A company that issues a ₹10 share for ₹100 records ₹10 as share capital and ₹90 as securities premium. The money is real. It has been received in full, and it belongs to the company.
What sets the premium apart from retained earnings is where it came from. Shareholders contributed it. The company did not earn it by trading. For a company that has raised money at a valuation, the premium account is often far larger than its paid-up capital, so the capital line on its own says little about how much money went in.
Where it sits in the balance sheet
Equity side- Share capitalthe face value of every share issued
- Securities premiuma line of its own within reserves, apart from share capital and from retained profits
- Retained profitswhat the company earned and kept
Same balance, other names: securities premium accountsecurities premium reserve
Net worth, not profit
02Why the premium counts towards net worth but not towards distributable profit
Both halves follow from what the premium is.
The company did not earn the premium. Paying it out as a dividend would hand shareholders' capital back to them as though it were profit. A balance can therefore sit inside the net worth figure and outside the pool available for dividends at the same time. Readers who expect the two to move together misread both.
Is it a free reserve, or a capital reserve?
- NoA free reserve?
It is not available for dividend, so it is not a free reserve.
- YesCapital in nature?
Shareholders contributed it, so it is capital in nature.
- Own lineThe line headed "capital reserve"?
It is kept in its own account and shown separately from that line.
The public record
03Permitted uses and the return of allotment filed with the ROC
A closed list
The Companies Act, 2013 restricts what a company may do with the securities premium account. The permitted uses form a closed list, and the restriction is the point: it stops the account being paid out under another name.
Under section 52(2), the account may be applied only to issue fully paid bonus shares to members, write off preliminary expenses, write off the expenses of, commission paid or discount allowed on an issue of shares or debentures, provide for the premium payable on redeeming preference shares or debentures, or buy back the company's own shares or other securities under section 68. A prescribed class of companies has a narrower list.
Can it be used to create a capital redemption reserve? Searches also ask this. No. Creating a capital redemption reserve is not one of the uses in section 52(2). Under section 55, when preference shares are redeemed out of profits, a sum equal to the nominal amount of the shares redeemed goes to the capital redemption reserve; the premium payable on redemption is a separate use the list does allow.
- 1Shares are issued
The premium is booked to its own account inside the company.
- 2A return of allotment is filed
Each issue of shares is reported to the Registrar of Companies.
- 3The figure can be traced
That filing is where the premium first becomes visible outside the company, and it is the record a reader traces the figure back to, independently of the company's own accounts.
Written by Subham Jhunjhunwala · Reviewed by CA Sundram Gupta
Sources: Companies Act, 2013, section 2(57) (Ministry of Corporate Affairs). This entry describes Indian practice in general terms and is not advice on a particular company's accounts.
Need help with a certificate that uses securities premium? See our Net Worth Certificate for Company.