Securities Premium

When a company issues shares for more than their face (par) value, the excess is the securities premium. If a share with a face value of a few rupees is issued at a much higher price, the gap above face value is the premium, recorded separately from share capital.

How it works

The premium is credited to a Securities Premium Account (also called securities premium reserve) on the liabilities side of the balance sheet. It is part of shareholders' funds but is treated as a capital reserve, not free profit, so it cannot be distributed as dividend.

In India

In India the account is governed by Section 52 of the Companies Act, 2013, which lists the limited purposes for which it may be used. Permitted uses include issuing fully paid bonus shares to members, writing off preliminary expenses, writing off the expenses or commission of a share or debenture issue, providing for the premium payable on redemption of redeemable preference shares or debentures, and buying back securities under Section 68.

Courts and tribunals have held that these uses are exhaustive, the balance cannot be casually transferred to retained earnings or used to pay dividends. This protects the funds that shareholders contributed above par.

For companies listing on the NSE or BSE through an IPO, the premium is usually the bulk of what they raise: the price band is set well above the small face value, so most of the issue proceeds land in this reserve. Investors can see it in the company's annual report under reserves and surplus.

Why it matters

For an equity investor, the securities premium reflects the value the market once assigned to the company's shares at issue. A large premium reserve gives a company a cushion for funding bonus issues or buybacks without touching trading profits.

Common mistakes

A frequent misunderstanding is treating the premium as profit available for dividends, it is not. Another is confusing face value with market price; a low face value does not mean a cheap share, since the bulk of the price typically sits in the premium.