Issue of Shares at Premium, Meaning, Journal Entries, and Utilization

When a company issues shares, they may choose to offer them at face value, at a discount, or at a premium. In the case of the Issue of Shares at Premium, the company charges a price higher than the face value of the share. The extra amount over the face value is known as Securities Premium. This premium amount is transferred to the Securities Premium Reserve Account, which is subject to specific rules regarding its utilization.

What is the Issue of Shares at Premium?

Issue of Shares at Premium refers to the situation when a company issues its shares at a price higher than their face value. The additional amount collected over and above the face value is called Securities Premium. Companies often issue shares at a premium due to their strong market position, goodwill, or high demand from investors.

For example, if the face value of a share is Rs 10, and the company issues it for Rs 15, then the extra Rs 5 is the premium amount. Thus, the total amount paid by the shareholder is Rs 15 per share, with Rs 10 credited to the Equity Share Capital Account and Rs 5 credited to the Securities Premium Reserve Account.

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Journal Entries for Issue of Shares at Premium

When shares are issued at a premium, the journal entries vary depending on the payment structure. The premium amount is credited separately to the Securities Premium Reserve Account.

Case 1: When the Full Amount is Payable on Application

If the full amount, including the premium, is received at the time of application, the journal entry will be:

At the time of receiving the application money:

Bank A/c Dr. (Total amount received)

                         To Equity Share Capital A/c (Face value of shares)

                         To Securities Premium Reserve A/c (Premium amount)

At the time of allotment (if applicable):

Equity Share Capital A/c Dr.

Securities Premium Reserve A/c Dr.

                        To Share Allotment A/c

Case 2: When the Premium is Payable on Allotment

If the premium amount is due at the time of allotment, the journal entries will be:

On receipt of application money:

Bank A/c Dr.

            To Equity Share Application A/c

On allotment (including premium):

Equity Share Allotment A/c Dr.

             To Equity Share Capital A/c

             To Securities Premium Reserve A/c

On receipt of allotment money:

Bank A/c Dr.

             To Equity Share Allotment A/c

Utilization of Securities Premium Account

The Securities Premium Reserve Account is treated as a capital reserve, meaning it cannot be distributed as dividends. According to Section 52(2) of the Companies Act, 2013, the Issue of Shares at Premium amount can only be used for specific purposes:

1. Issuing fully paid-up bonus shares to existing shareholders.

2. Writing off preliminary expenses of the company.

3. Writing off expenses, commission, or discount related to the issue of shares or debentures.

4. Providing for the premium on redemption of preference shares or debentures.

5. Buying back shares as per Section 68 of the Companies Act.

Any other usage of the Securities Premium Reserve is restricted under the law to protect investor interests.

Presentation in the Balance Sheet

The premium collected from the Issue of Shares at Premium is classified under Reserves & Surplus in the Equity & Liabilities section of the balance sheet. It is not treated as revenue because it represents a capital gain rather than an operational income.

Example of Balance Sheet Presentation

Liabilities

• Equity Share Capital: ₹ X

• Securities Premium Reserve: ₹ Y

Assets

• Bank Balance (from share issue proceeds): ₹ X + Y

The Securities Premium Reserve remains on the balance sheet until it is utilized as per the prescribed guidelines.

Solved Questions on Issue of Shares at Premium

Example 1: Shares Issued at Premium with Full Payment on Application

MNO Ltd. invited applications for 40,000 equity shares of Rs 10 each at a premium of Rs 2 per share. The entire amount was payable at the time of application, and shares were fully subscribed.

Journal Entries:

Bank A/c Dr. 4,80,000

               To Equity Share Capital A/c 4,00,000

               To Securities Premium Reserve A/c 80,000

(Being application money received, including premium)

Equity Share Capital A/c Dr. 4,00,000

Securities Premium Reserve A/c Dr. 80,000

                To Share Allotment A/c 4,80,000

(Being shares allotted and premium transferred to reserves)

Example 2: Shares Issued at Premium with Installments

Neeta Ltd. issued 1,500 shares of Rs 10 each at a premium of Rs 3 per share, payable as follows:

• Rs 4 on application
• Rs 4 on allotment (including premium)
• Remaining Rs 5 on the first and final call

Journal Entries:

On receiving application money:

Bank A/c Dr. 6,000

            To Equity Share Application A/c 6,000

On allotment (including premium):

Equity Share Allotment A/c Dr. 7,500

             To Equity Share Capital A/c 4,500

             To Securities Premium Reserve A/c 3,000

On receiving allotment money:

Bank A/c Dr. 7,500

              To Equity Share Allotment A/c 7,500

On first and final call:

Equity Share First & Final Call A/c Dr. 7,500

              To Equity Share Capital A/c 7,500

On receiving the final call money:

Bank A/c Dr. 7,500

               To Equity Share First & Final Call A/c 7,500

The Issue of Shares at Premium allows companies to raise capital beyond the face value of shares, strengthening their financial position. The premium amount collected is not considered profit but rather a capital reserve, with strict regulations on its usage under the Companies Act, 2013. Proper journal entries and compliance with legal provisions ensure transparency in accounting.

By understanding the Issue of Shares at Premium, businesses can effectively manage their share capital while investors can make informed decisions.

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