When a company raises capital by issuing shares above their face value, the additional amount received is known as share premium. For example, if a company issues a share with a face value of ₹10 for ₹50, the ₹10 forms part of share capital and the additional ₹40 represents the securities premium.
For growing companies, promoters and finance teams, an important question often arises: Can the cash received from share premium be used for business purposes? And can the balance standing in the securities premium account be used like ordinary reserves?
The answer requires a clear distinction between cash generated from a share issue and the securities premium account recorded in the company’s books.
Under Section 52 of the Companies Act, 2013, the premium received on the issue of shares is required to be transferred to a separate Securities Premium Account. The law also prescribes specific purposes for which the securities premium account may be applied.
What is share premium?
Share premium arises when a company issues shares at a price higher than their face value.
For example, assume a company issues 1,00,000 equity shares having a face value of ₹10 each at an issue price of ₹60 per share.
The company receives ₹60 lakh in cash. Of this amount, ₹10 lakh represents share capital and ₹50 lakh represents securities premium.
The accounting entry would broadly reflect the receipt of the total subscription money, with the premium component being transferred to the Securities Premium Account.
The securities premium is not ordinary operating income. It is a capital receipt and forms part of the company’s equity/reserves rather than revenue generated from business operations.
Can the cash received from share premium be used by the company?
This is where the distinction becomes important.
Cash received from an issue of shares can become part of the company’s overall cash resources. Once the share issue has been completed and the funds have been validly received, the company may use its available cash for legitimate business purposes, subject to the Companies Act, the terms of the issue, applicable securities laws, contractual restrictions and other applicable regulations.
For example, a company may require funds to purchase inventory, pay employees, develop technology, acquire fixed assets, expand operations or meet working-capital requirements.
However, this does not automatically mean that the company can debit its Securities Premium Account for those expenses.
The restriction under Section 52 concerns the application of the securities premium account, not simply the physical movement of cash in the company’s bank account. The accounting and legal treatment therefore needs to be considered separately.
This distinction is particularly important because cash is a fungible asset. A company may have ₹1 crore in its bank account representing funds raised through a combination of share capital, securities premium, borrowings and operating receipts. It is generally not meaningful to identify a particular rupee in the bank account as “share premium cash”. The important question is how the transaction is legally and accounting-wise recorded and whether the company is applying the securities premium account for a permitted purpose.
What can the Securities Premium Account be used for?
Section 52 of the Companies Act, 2013 specifically permits the securities premium account to be applied for certain purposes. These include issuing fully paid bonus shares, writing off specified preliminary expenses, writing off certain expenses or commission relating to an issue of shares or debentures, providing for premium payable on redemption of specified redeemable preference shares or debentures, and purchasing the company’s own shares or other securities under the applicable buy-back provisions.
The precise availability of certain applications can also depend on the type of company and the applicable accounting framework.
For certain classes of companies whose financial statements comply with the accounting standards prescribed under the Companies Act, the permitted applications under the relevant provision are narrower. ICAI material also highlights these distinctions when explaining the application of securities premium.
Therefore, a company should not treat the securities premium account as a general-purpose reserve that can simply be used to absorb any expense.
Can securities premium be used to pay salaries or normal business expenses?
Generally, ordinary business expenses should not simply be debited to the Securities Premium Account merely because the company has a large securities premium balance.
Consider a company with ₹2 crore in its securities premium account. It has ₹3 crore of cash available and needs ₹50 lakh to fund employee salaries and operating expenses.
The company can use its available cash to pay legitimate business expenses, subject to the applicable laws and restrictions. However, the corresponding expense would ordinarily be recognised in the profit and loss account in accordance with the applicable accounting framework.
The company should not simply pass an accounting entry reducing the securities premium account by ₹50 lakh unless the transaction falls within a legally permitted application of that account.
This distinction is critical for financial reporting, corporate law compliance and audit purposes.
Can securities premium be used for business expansion?
A common misconception is that a company cannot use funds raised at a premium for business expansion.
The better way to look at it is to distinguish between using the company’s cash and using the securities premium reserve.
Suppose a company raises ₹10 crore by issuing shares at a premium. The company may have substantial cash available after the fundraise. If the funds are intended for business expansion, the company may deploy its available funds toward legitimate purposes such as expansion of manufacturing capacity, technology development, working capital, acquisitions or other permitted business activities, subject to the terms of the fundraising and applicable laws.
The fact that part of the amount received represents securities premium does not mean that the physical cash must remain untouched in a separate bank account.
However, the company should maintain proper documentation demonstrating the purpose of the fundraising and ensure that the deployment of funds does not breach any statutory, regulatory, investor or contractual restrictions.
Can securities premium be converted into bonus shares?
Yes. One of the specifically recognised uses of the securities premium account is the issue of fully paid bonus shares to members, subject to the applicable provisions and procedures.
This can be relevant where a company has accumulated securities premium but wants to strengthen its issued share capital without bringing additional cash into the business.
The transaction does not represent new cash being generated. Instead, it involves an internal movement within shareholders’ funds, subject to the applicable legal requirements.
Can securities premium be used for a buy-back?
Yes, securities premium can be applied for the purchase of the company’s own shares or other securities under the applicable buy-back provisions of the Companies Act.
However, a buy-back is not simply an accounting adjustment. It involves specific statutory conditions, approvals, limits, documentation, filings and other compliance requirements.
Therefore, companies considering a buy-back should assess the complete transaction before deciding to utilise the securities premium account.
Can share premium be used to write off expenses?
Section 52 permits the securities premium account to be used for certain specified expenses, including certain expenses, commission or discount relating to an issue of shares or debentures. It also contains provisions concerning preliminary expenses, subject to the applicable company and accounting framework.
The important point is that not every expense incurred by the company can be written off against securities premium.
The nature of the expense, the relevant legal provision, the type of company and the applicable accounting standards should be evaluated before passing the accounting entry.
ICAI guidance also emphasises the importance of appropriate accounting treatment and tax effects when expenses or other items are adjusted directly against reserves or securities premium.
A simple example
Assume ABC Private Limited issues shares for ₹1 crore.
The face value of the shares is ₹20 lakh and the securities premium is ₹80 lakh.
The company therefore receives ₹1 crore in cash.
After the fundraising, the company may use its available cash for legitimate business requirements such as purchasing machinery, funding working capital or expanding operations, provided the use of funds is consistent with the applicable legal and contractual requirements.
At the same time, the ₹80 lakh securities premium continues to be reflected within shareholders’ funds.
If the company later wants to use the securities premium account itself, it must determine whether the proposed application falls within the permitted purposes under Section 52 and other applicable provisions.
This is why cash utilisation and securities premium utilisation should not be treated as the same accounting question.
What should companies avoid?
Companies should avoid treating the securities premium account as a freely distributable reserve.
For example, simply transferring securities premium to the profit and loss account, using it to pay ordinary expenses through a direct reserve adjustment, or distributing it to shareholders as if it were normal distributable profit can create significant legal and accounting issues.
The company should also avoid making accounting entries solely to achieve a desired balance-sheet presentation without first establishing the legal basis for the transaction.
A well-documented approach should consider the Companies Act, applicable accounting standards, tax implications, board and shareholder approvals where required, financial statement presentation, audit requirements and the underlying commercial purpose.
Why the distinction matters for CFOs and promoters
For a promoter-led company, the securities premium account can become significant after a private placement, rights issue, preferential allotment, venture capital investment or institutional fundraising.
As the company grows, the question may shift from “How much money have we raised?” to “How should the capital structure be managed?”
This may involve decisions around bonus shares, buy-back, capital restructuring, future fundraising, acquisitions, business expansion and shareholder returns.
A proper review of the securities premium account can therefore form part of a broader capital structure and corporate finance strategy, rather than being treated as a routine accounting matter.
Frequently Asked Questions
Is share premium part of share capital?
No. Share premium is not the face-value share capital. The premium received on the issue of shares is transferred to the Securities Premium Account and is presented separately within shareholders’ funds.
Can a company spend the cash received from a share issue?
Subject to applicable laws, the terms of the issue, investor agreements and other restrictions, the company’s available cash can be deployed for legitimate business purposes. The fact that the funds were raised through an issue at premium does not mean that the physical cash has to remain unused.
Can securities premium be used for salaries?
Securities premium should not ordinarily be directly debited for routine employee salaries merely because a balance exists in the account. Normal operating expenses should be accounted for under the applicable accounting framework.
Can securities premium be used to buy assets?
The company may use its available cash for acquiring assets, subject to applicable restrictions. However, this should not be confused with directly debiting the Securities Premium Account for the cost of the asset.
Can securities premium be used for bonus shares?
Yes, issue of fully paid bonus shares is one of the recognised applications of securities premium, subject to the applicable legal requirements.
Can securities premium be used for buy-back?
Yes, subject to the applicable provisions governing buy-back of securities.
Can securities premium be transferred to general reserve?
The company should not assume that securities premium can simply be transferred or used like an unrestricted general reserve. The proposed transaction should be evaluated under the Companies Act and applicable accounting requirements.
Is securities premium taxable as business income?
Securities premium arising from the issue of shares is generally a capital receipt rather than ordinary business revenue. However, tax implications can arise depending on the facts, including the valuation and circumstances surrounding the issue. A separate tax analysis should therefore be undertaken where relevant.
How SRC Can Help
SRC Chartered Accountants can assist companies, promoters and finance teams in reviewing the accounting and corporate law implications of share premium, securities premium account and capital restructuring transactions.
The scope can include reviewing the proposed use of securities premium, evaluating the accounting treatment, assessing applicable Companies Act requirements, supporting board and shareholder documentation, reviewing capital restructuring options, and coordinating the financial reporting implications.
For companies that have recently raised capital through private placement, preferential allotment, rights issue or institutional investment, SRC can also help assess how the capital can be structured and deployed efficiently while maintaining appropriate corporate, accounting and tax compliance.
The objective is not simply to determine whether a particular accounting entry can be passed. It is to ensure that the commercial objective, legal framework, accounting treatment and financial reporting position work together.