Q.What are the uses of securities premium?

The Securities Premium account is a credit balance created when a company issues shares at a price above their face value (e.g., issuing a ₹10 share for ₹15). This amount is not free profit; the Companies Act strictly lists the purposes for which it can be applied.

The permitted uses under Section 52 of the Companies Act, 2013, are:

The Concept: Why Securities Premium Cannot Be Treated as Free Reserves

When a company issues shares at a price above their face value, the excess amount collected is called securities premium. This is not revenue profit — it is a capital receipt. The law (Section 52 of the Companies Act, 2013) strictly limits how this money can be used. You cannot simply distribute it as a dividend or use it for any revenue expense. Think of it as a capital reserve with earmarked uses — it sits in the balance sheet under "Reserves and Surplus" but is ring-fenced.

The logic is simple: shareholders who paid a premium did so expecting the company to use that extra money for strengthening the business, not for paying dividends or covering routine losses. So the Act lists five — and only five — permitted applications.

The Five Permitted Uses of Securities Premium

Let us examine each use in detail.

1. Issuing Fully Paid Bonus Shares

This is the most common use. When a company wants to capitalise its reserves and issue bonus shares, it can use the securities premium account. The entry is:

The bonus shares are then issued by crediting Share Capital A/c and debiting Bonus to Shareholders A/c.

2. Writing Off Preliminary Expenses

Preliminary expenses are costs incurred before the company starts business — legal fees, incorporation costs, stamp duty, etc. These are shown as a fictitious asset (or miscellaneous expenditure) in the balance sheet. The company can write them off against securities premium instead of against the Profit & Loss A/c.

3. Writing Off Underwriting Commission, Discount on Issue of Shares or Debentures

When a company pays commission to underwriters or allows discount on the issue of shares/debentures, these are capital losses or expenses. They can be written off against securities premium.

Similarly for discount on issue of shares or debentures.

4. Providing for Premium Payable on Redemption of Preference Shares or Debentures

When redeemable preference shares or debentures are redeemed at a premium, the company must provide for that premium. The premium payable on redemption can be charged to securities premium.

5. Buyback of Shares (Under Section 68)

When a company buys back its own shares, it must use "free reserves" — and securities premium is specifically allowed for this purpose under the buyback provisions. The amount used from securities premium for buyback is transferred to a Capital Redemption Reserve (if required) or used directly.