Companies Act Section 52

Companies Act – Section 52: Application of Premiums Received on the Issue of Shares

1. Overview of Section 52  

Section 52 of the Companies Act deals with the treatment of share premiums – the amount received by a company over and above the nominal or face value of its shares when they are issued. This section ensures that premiums collected during a share issue are accounted for separately in a securities premium account. It also lays down specific rules on how these funds can be used and the restrictions imposed on their application.

The provision ensures that share premiums, which represent a surplus amount over nominal share capital, are treated prudently and are not freely available for general distribution. Instead, their use is restricted to certain prescribed purposes to maintain the financial integrity of the company.

2. Creation of Securities Premium Account (Subsection 1)  

Whenever a company issues shares at a premium, whether for cash or otherwise, the amount received over the face value of the shares must be transferred to a separate “securities premium account.” This account functions as a part of the company’s equity but is governed by rules similar to those applicable to paid-up share capital. This ensures that funds accumulated in the securities premium account cannot be arbitrarily used or distributed.

Application of Share Capital Rules: The provisions of the Companies Act relating to the reduction of share capital will also apply to the securities premium account, treating it as if it were paid-up capital. This means that any reduction of the securities premium account will require compliance with the legal procedures applicable to share capital reduction, including obtaining necessary approvals from shareholders and regulatory bodies.

3. Permitted Uses of the Securities Premium Account (Subsection 2)  

Although the securities premium account is subject to restrictions, the Companies Act allows companies to apply it towards specific purposes without treating it as a general reserve. These permitted uses include:  

(a) Issuance of Fully Paid Bonus Shares:  

The securities premium can be used to issue bonus shares to existing shareholders. These are additional shares given without any extra payment, thereby converting the premium reserve into share capital.  

(b) Writing off Preliminary Expenses:  

The account may be used to write off preliminary expenses, which are the costs incurred during the formation of the company, such as legal fees, registration charges, and consulting costs.  

(c) Writing off Issue Expenses or Discounts on Shares/Debentures:  

The securities premium may also be used to offset expenses or commissions incurred during the issue of shares or debentures, or any discounts offered on their issue.  

(d) Providing for Premium on Redemption of Preference Shares or Debentures:  

If the company has issued redeemable preference shares or debentures that include a premium upon redemption, the securities premium account can be used to meet the additional premium required for redemption.  

(e) Purchase of Own Shares or Securities under Section 68:  

Companies are also permitted to apply the securities premium account for the buyback of shares or other securities, as per the provisions laid out in Section 68 of the Act.

4. Additional Flexibility for Certain Classes of Companies (Subsection 3)  

The Companies Act provides further flexibility to certain classes of companies that comply with accounting standards prescribed under Section 133. For these companies, the permitted uses of the securities premium account include:

(a) Issuing Fully Paid Bonus Shares:  

Similar to the general provision, these companies may use the premium account to issue bonus equity shares to existing members, thereby increasing the share capital without requiring additional investment from shareholders.  

(b) Writing off Expenses or Discounts on Equity Shares:  

They can also apply the securities premium to write off issue-related expenses or discounts allowed on equity shares issued by the company.

(c) Buyback of Shares or Securities under Section 68:  

As with other companies, the securities premium can be used for the buyback of shares or other securities under Section 68, facilitating the reduction of share capital when necessary.

5. Importance of the Securities Premium Account  

The securities premium account plays a vital role in maintaining the company’s financial structure. The specific and restricted uses of the account ensure that premium funds are not distributed as dividends or used for general business purposes. This prudence helps in the following ways:

Preserves Capital Integrity: Treating the securities premium as equivalent to paid-up share capital ensures that the company’s financial health remains intact and that shareholders’ equity is protected.  

Encourages Responsible Financial Management: By restricting the use of premium funds to specific purposes, the law promotes sound financial practices.  

Facilitates Corporate Actions: The premium account provides a flexible source of funds for critical corporate activities, such as issuing bonus shares or redeeming preference shares.