When a company sells its shares for more than their face value, something interesting happens on the balance sheet. The extra money collected doesn’t get treated like ordinary trading profit. It goes into a separate box marked “capital,” with strict rules on how it can be spent. This is the Share Premium, or Securities Premium as it’s formally called under Indian company law. Understanding how this account works, and where it can legally travel, is a recurring theme in final accounts problems, and it’s also a real compliance issue for every Indian company that raises capital above par.

Table of Contents

What exactly is share premium?

Face value is the nominal price printed on a share certificate, say โ‚น10. If investors are willing to pay โ‚น15 for that same share because the company has a strong track record or growth story, the additional โ‚น5 is the premium. Multiply that by the number of shares issued, and you get the total premium collected during that issue.

This premium is not revenue. The company hasn’t sold a product or earned interest. It has simply raised capital at a price the market found attractive. Because of this, accounting standards classify it as a capital profit rather than a revenue profit, and capital profits are treated very differently from trading profits when it comes to what a company is allowed to do with them.

The treatment of share premium isn’t just an accounting convention. It is backed by statute. Section 52 of the Companies Act, 2013 requires that whenever a company issues shares at a premium, the entire premium amount, whether received in cash or in kind, must be transferred to a account called the Securities Premium Account.

The law then does something clever: it treats this account almost as if it were share capital itself. Any reduction of the Securities Premium Account is subject to the same procedural safeguards that apply to a reduction of share capital, which usually needs approval from the National Company Law Tribunal. In practical terms, this means a company cannot casually dip into this account to prop up its dividend payouts or plug operating losses. The reserve is ring-fenced, and its use is confined to a specific, limited list of purposes laid out in the Act itself.

Where can the Securities Premium Account actually be used?

This is the part most final accounts questions revolve around. Section 52(2) lists exactly what the balance in this account may be applied toward. Outside of this list, any use is treated as an unauthorised reduction of capital.

Permitted uses under the law

  • Issuing fully paid bonus shares to existing members, within the limit of the company’s unissued share capital.
  • Writing off preliminary expenses incurred while forming the company, such as legal fees, registration charges, and incorporation costs.
  • Writing off expenses, commission, or discount on the issue of shares or debentures of the company.
  • Paying the premium payable on the redemption of preference shares or debentures.
  • Buying back its own shares, in accordance with the buy-back provisions of the Act.

These purposes share a common thread: every one of them is a capital-related expense, not an operating one. Whether the company is honouring a prior commitment (like preference share redemption) or absorbing a cost tied directly to raising funds (like underwriting commission), the money stays within the “capital” domain. This is exactly why the law refuses to let this account substitute for free reserves that could otherwise be distributed as dividends.

What it cannot be used for

It’s worth being equally clear about the restrictions, because exam questions love testing this boundary. The Securities Premium Account cannot be used to pay dividends to shareholders, cannot be used to write off a trading loss, and generally cannot be used for any purpose beyond the five listed above without going through the formal capital-reduction process. Treating it as a routine reserve available for general business needs is one of the most common conceptual mistakes students make.

How the accounting actually works

Suppose a company issues 1,00,000 equity shares of โ‚น10 each at a price of โ‚น15 per share, and the full amount is received. The paid-up share capital increases by โ‚น10,00,000, and the excess โ‚น5,00,000 is credited separately.

Particulars Debit (โ‚น) Credit (โ‚น)
Bank Account Dr. 15,00,000
   To Share Capital Account 10,00,000
   To Securities Premium Account 5,00,000

Now say this same company had incurred โ‚น1,20,000 in preliminary expenses while it was being formed, and it wants to write these off against the premium instead of routing them through the Statement of Profit and Loss over several years. The entry would look like this:

Particulars Debit (โ‚น) Credit (โ‚น)
Securities Premium Account Dr. 1,20,000
   To Preliminary Expenses Account 1,20,000

After this write-off, the Securities Premium Account carries a balance of โ‚น3,80,000 (โ‚น5,00,000 minus โ‚น1,20,000). This remaining balance doesn’t just sit idle waiting for the next transaction. It has a designated home on the balance sheet.

Where the balance shows up in final accounts

Under the balance sheet format prescribed by Schedule III of the Companies Act, companies present their financial statements in a standardised structure so that figures are comparable across firms. Securities Premium is specifically listed as one of the sub-heads under Reserves and Surplus, which itself sits under Shareholders’ Funds on the equity and liabilities side of the balance sheet.

So after all permitted deductions, whatever balance remains in the Securities Premium Account is disclosed on the liabilities side, grouped alongside items like the Capital Redemption Reserve, General Reserve, and the surplus in the Statement of Profit and Loss. Schedule III also requires that any negative balance elsewhere within Reserves and Surplus be adjusted and shown transparently, rather than hidden or netted off incorrectly.

A simplified extract

Particulars Amount (โ‚น)
Reserves and Surplus
Securities Premium Account 3,80,000
General Reserve xx,xxx
Surplus (Statement of P&L) xx,xxx

Why this matters beyond the exam hall

It’s tempting to treat this as a rote accounting rule, but the underlying logic is about protecting the interests of shareholders and creditors alike. When investors pay a premium, they are backing the company’s future, not funding a payout to existing owners. If a company could freely spend this money on dividends or losses, the capital base that creditors rely on for security would quietly erode. By restricting the account’s use to the five specific purposes and mandating clear disclosure under Reserves and Surplus, the law ensures that capital raised at a premium stays within the capital domain, and that anyone reading the balance sheet can see exactly how much premium was collected and how it has been applied.

This also connects to good corporate governance. A company that transparently shows its Securities Premium Account, along with the deductions made against it, gives auditors, regulators, and investors a clean trail to verify compliance. Getting this treatment wrong, whether in an exam or in actual financial statements, isn’t just a technical slip. It misrepresents the company’s real capital position.

Common mistakes to watch for

  • Treating the entire premium as distributable profit available for dividends.
  • Writing off revenue expenses, such as routine operating costs, against the Securities Premium Account instead of restricting it to the permitted capital items.
  • Forgetting to show the remaining balance separately as a sub-head under Reserves and Surplus rather than merging it silently into General Reserve.
  • Ignoring the ceiling on bonus share issues, since bonus shares funded through this account cannot exceed the company’s unissued share capital.

What do you think? If a company has a large Securities Premium balance but is also struggling with cash flow for daily operations, should the law allow more flexibility in how this reserve is used, or does the current restriction serve a more important long-term purpose? And when you’re solving a final accounts problem, how do you decide whether an expense qualifies to be written off against share premium or should instead go through the Statement of Profit and Loss?

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References
  1. https://www.setindiabiz.com/blog/securities-premium-section-52
  2. https://www.registerkaro.in/post/section-52-of-companies-act-2013
  3. https://callmyca.com/blog/section-52-of-the-company
  4. https://www.icai.org/resource/56994bos46206cp5annex.pdf
  5. https://www.taxmann.com/post/blog/schedule-iii-of-the-companies-act

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Corporate Accounting

1 General Introductions

  1. Meaning of Company
  2. Special Features of a Company
  3. Kinds of Companies
  4. Distinction between a Company and a Partnership
  5. Formation of a Company
  6. Allotment of Shares
  7. Statutory Books
  8. Books of Account
  9. Share Capital
  10. Classes of Shares

2 Accounting for Share Capital

  1. Procedure for Issue of Shares
  2. Basic Accounting Entries for Issue of Shares
  3. Issue of Shares for Consideration other than Cash
  4. Issue of Shares for Cash
  5. Oversubscription of Shares
  6. Calls in Arrears
  7. Calls in Advance
  8. Forfeiture of Shares
  9. Reissue of Forfeited Shares
  10. Concept and Process of Book Building
  11. Issue of Right Shares

3 Buy Back of Shares

  1. Conditions for Buy Back of Shares
  2. Motives of Buy Back of Shares
  3. SEBI Guidelines Regarding Buy Back of Shares
  4. Methods of Buy Back of Shares
  5. Advantages of Buy Back of Shares
  6. ESCROW Account
  7. Accounting for Buy Back of Shares

4 Redemption of Preference Shares

  1. Conditions for Redemption of Preference Shares
  2. Accounting/Methods for Redemption of Preference Shares
  3. Issue of Bonus Shares
  4. SEBI Guidelines for Issue of Bonus Shares
  5. Circumstances for Issue of Bonus Shares
  6. Sources for the Issue of Bonus Shares
  7. Advantages of Issue of Bonus Shares

5 Issues and Redemption of Debentures

  1. What is a Debenture?
  2. Difference between Shares and Debentures
  3. Types of Debentures
  4. Issue of Debentures
  5. Issue of Debentures as a Collateral Security
  6. Debentures Issued at Different Terms
  7. Writing off Loss on Issue of Debentures
  8. Redemption of Debentures
  9. Sinking Fund Method

6 Final Accounts-I

  1. Company Final Accounts
  2. Legal Requirements as to Profit and Loss Account
  3. Income
  4. Expenses and Provisions
  5. Appropriation of Profits
  6. Forms of Profit and Loss Account
  7. Special Features of Company Profit and Loss Account
  8. Legal Requirements as to Company Balance Sheet
  9. Proforma of Balance Sheet
  10. Liabilities
  11. Assets
  12. Summarized Balance Sheet (Vertical Form)

7 Final Accounts-II

  1. Preliminary Expenses
  2. Expenses on Issue of Shares and Debentures
  3. Discount on Issue of Shares and Debentures
  4. Premium on Issue of Shares
  5. Calls in Arrears and Calls in Advance
  6. Forfeited Shares
  7. Depreciation on Fixed Assets
  8. Provision for Taxation
  9. Dividends
  10. Interest on Debentures
  11. Transfer to Reserves
  12. Balance of Profit and Loss Account
  13. Preparation of Final Accounts

8 Cash Flow Statement

  1. Need for Cash Flow Statement
  2. Cash Flow Statements vs. Other Financial Statements
  3. Preparation of Cash Flow Statement
  4. Regulations Relating to Cash Flow Statement
  5. Cash Flow Statement Formats
  6. Cash Flow from Operating Activities
  7. Cash Flow From Investing and Financing Activities
  8. Uses of Cash Flow Analysis
  9. Distinctions between Funds Flow and Cash Flow Analysis

9 Accounts of Holding Companies-I

  1. Concept
  2. Objectives of Holding Company
  3. Types of Holding Company
  4. Advantages of Holding Company
  5. Limitations of Holding Company
  6. Preparation of Final Account of Holding Company without Adjustment

10 Accounts of Holding Companies-II

  1. Difference between Wholly owned and Partly owned Subsidries
  2. Exemptions from Preparation of Consolidated Financial Statements
  3. Consolidated Financial Statement
  4. Advantages of Consolidated Financial Statements
  5. Disadvantages of Consolidated Financial Statements
  6. Procedure of Preparing Consolidated Financial Statements

11 Valuation of Goodwill

  1. Meaning of Goodwill
  2. Characteristics of Goodwill
  3. Nature of Goodwill
  4. Factors Affecting Value of Goodwill
  5. Need for the Valuation of Goodwill
  6. Average Profit Method
  7. Weighted Average Profit Method
  8. Super Profit Method
  9. Capitalization Method
  10. Annuity Method
  11. Purchase Method

12 Valuation of Shares

  1. Meaning of Valuation of Shares
  2. Factors affecting Valuation of Shares
  3. Need for the Valuation of Shares
  4. Methods of Valuation of Shares
  5. Average Profit Method
  6. Weighted Average Profit Method
  7. Super Profit Method
  8. Capitalization Method
  9. Annuity Method

13 Amalgamation of Companies – Basic Concepts

  1. Objectives of Amalgamation
  2. Reconstruction
  3. Difference between Amalgamation, Absorption and Reconstruction
  4. Important Terms in Amalgamation
  5. Methods of Accounting for Amalgamation
  6. Treatment of Reserves on Amalgamation
  7. Treatment of Goodwill arising on Amalgamation
  8. Purchase Consideration

14 Amalgamation of Companies – Accounting Treatment

  1. Accounting Entries in the Books of Transferee (Purchasing) Company
  2. Accounting Entries in the Books of Transferor Company
  3. Preparation of Balance Sheet in the Books of Transferee Company
  4. Pooling of Interest Method
  5. Purchase Consideration Method

15 Internal Reconstruction

  1. Meaning and Objectives of Internal Reconstruction
  2. Steps Involved in Internal Reconstruction
  3. Methods or Modes of Internal Reconstruction and Accounting Procedure

16 Banking and Non-Banking Companies – Basic Concepts

  1. Banking Companies
  2. Non-Banking Financial Company
  3. Residuary Non-Banking Company
  4. Difference between NBFCs and Banks
  5. Depositors Concern and NBFC Regulations
  6. Periodical Returns to be Submitted to RBI
  7. Balance Sheet of NBFCs
  8. Stockinvest Scheme

17 Accounts of Banking Companies – Accounting Treatment

  1. Minimum Capital & Reserve
  2. Books of Accounts
  3. Some Important Terms
  4. P&L Account and Balance Sheet of Banking Companies

18 Commercial Bank

  1. Meaning
  2. Functions of Commercial Bank
  3. Structure of Indian Commercial Banks
  4. Sources of Funds
  5. Investment Norms
  6. Asset Structure of Commercial Banks

19 Non-Performing Assets

  1. Meaning and Definition
  2. Classification of Non-performing Assets
  3. Reasons for Growing Non-performing Assets
  4. Provisions for Non-performing Assets
  5. Suggestions to Reduce Non-performing Assets
  6. Non-performing Assets Recovery Mechanism