Question

Explain the treatment of 'Securities Premium' according to the Companies Act, 2013.

Hint:

Securities Premium is a capital reserve under Section 52 and can be used only for specific purposes like bonus shares, issue expenses, or redemption premium.

Answer 1

Concept: When a company issues shares at a price higher than their face value, the excess amount is called Securities Premium. The Companies Act, 2013 provides strict rules for its utilization to ensure transparency and protection of investors.
Step 1: Meaning of Securities Premium. Securities Premium arises when shares are issued at a premium, i.e., issue price $>$ face value. \[ \text{Securities Premium} = \text{Issue Price} - \text{Face Value} \] The amount received is credited to a separate account called the Securities Premium Reserve.  
Step 2: Treatment as per Companies Act, 2013 (Section 52). The Securities Premium Reserve cannot be distributed as dividend and must be shown under the head {Reserves and Surplus} in the balance sheet. 
Step 3: Permitted uses of Securities Premium. As per the Act, it can be used only for the following purposes:

• Issuing fully paid bonus shares to existing shareholders
• Writing off preliminary expenses of the company
• Writing off expenses or commission on issue of shares/debentures
• Providing premium payable on redemption of preference shares or debentures
• Buy-back of shares (as per prescribed rules)

Step 4: Restriction on usage. It cannot be used for general business purposes or distributed as profits, ensuring capital protection. 
Conclusion: Under the Companies Act, 2013, Securities Premium is treated as a capital reserve with restricted utilization and must be used only for legally specified purposes.