Q.Describe the purposes for which a company can use the amount of Securities Premium.

Let’s start with something you already know. Suppose you buy a ₹10 note from a friend for ₹15. You paid ₹5 more than the face value. That extra ₹5 is a premium. In the business world, when a company issues shares worth ₹10 each but investors are willing to pay ₹15, the extra ₹5 per share is called securities premium. It’s not profit from selling goods — it’s money raised over and above the face value of shares.

Now, the company cannot simply treat this premium as free cash to distribute as dividends. The law (Companies Act, 2013) says this money must be used only for specific purposes. That’s the whole point: securities premium is a reserve with strings attached.

What is Securities Premium?

When a company issues shares at a price higher than their face value, the excess amount collected is credited to a separate account called Securities Premium Reserve. This is shown under Reserves and Surplus on the liabilities side of the Balance Sheet.

For example, if a company issues 10,000 shares of ₹10 each at ₹15, the total amount received is ₹1,50,000. Of this:

• ₹1,00,000 (10,000 × ₹10) is share capital.
• ₹50,000 (10,000 × ₹5) is securities premium.

Why Does It Matter?

The premium represents extra money investors paid because they believed the company was worth more than its face value. Using it wrongly would mislead shareholders and violate the law. So the Act lists five specific uses — and only these — for securities premium:

1. Issue of fully paid bonus shares to existing shareholders (capitalisation of reserves).
2. Writing off preliminary expenses (costs of forming the company).
3. Writing off expenses, commission, or discount on issue of shares or debentures.
4. Providing for the premium payable on redemption of preference shares or debentures.
5. Buying back its own shares (only the premium portion can be used for this).

Accounting Treatment

When the premium is received, the journal entry is:

Bank A/c Dr. (total amount received)

  To Share Capital A/c (face value)

  To Securities Premium Reserve A/c (premium amount)

When it is used, the Securities Premium Reserve account is debited (reduced), and the relevant expense or reserve account is credited.

Example: Writing off preliminary expenses of ₹20,000 using securities premium

Example: Issuing bonus shares (say 1,000 bonus shares of ₹10 each fully paid)

Then, when bonus shares are actually issued: …