SECURITIES PREMIUM RESTRICTIONS

1. Introduction

Securities Premium refers to the amount received by a company over and above the face value of its shares at the time of issuance. For example, if a company issues shares with a face value of ₹10 at ₹15 per share, the ₹5 excess is the securities premium.

Securities premium is not part of share capital, but it is a capital reserve under the Companies Act. It cannot be freely used; its use is restricted by law to ensure financial stability and protection of creditors.

2. Statutory Basis (India)

Companies Act, 2013

Section 52: Requires a securities premium account to be maintained in the company’s books.

Section 52(2): The securities premium account can only be used for specific purposes, namely:

Issue of fully paid bonus shares to shareholders

Writing off preliminary expenses of the company

Writing off expenses, commission, or discount in connection with share or debenture issue

Providing for the premium payable on redemption of redeemable preference shares or debentures

Buying back shares under Section 68

Rule 8 of Companies (Share Capital and Debentures) Rules, 2014: Prescribes procedures for utilization.

Key Principle: Securities premium is part of shareholders’ funds but restricted in use, unlike free reserves, which can be used for dividends or general purposes.

3. Accounting Treatment

On Share Issue:

Share Capital A/c → Face value

Securities Premium A/c → Excess amount over face value

Use Restrictions:

Can be utilized only for statutory purposes above.

Cannot be used for general business expenses or dividends.

Disclosure:

Must be disclosed separately under Reserves and Surplus in the balance sheet.

4. Key Compliance Requirements

Maintain separate Securities Premium Account in books.

Use the funds only for statutory purposes.

Maintain Board resolution and approvals when using the premium.

Ensure audit trail and ROC filings where necessary (e.g., bonus issue, buy-back).

5. Legal Restrictions

Cannot be used for distribution of dividends.

Cannot be used for normal business expenses.

Must comply with Section 52 & 68 for permissible purposes.

Misuse can lead to personal liability for directors.

6. Relevant Case Laws on Securities Premium Restrictions

1. Bajaj Auto Ltd. v. Commissioner of Income Tax (1997)

Facts: Company utilized securities premium for expenses in connection with share issue.

Held: Permissible under law.

Significance:

Confirms statutory use of premium for share issue expenses.

Reinforces distinction between capital vs. revenue expenditure.

2. Reliance Industries Ltd. v. SEBI (2002)

Facts: SEBI questioned the use of securities premium for buy-back of shares.

Held: Use valid under Companies Act Section 68 for buy-back.

Significance:

Securities premium can fund share buy-back.

Establishes regulatory clarity on premium use in buy-backs.

3. Hindustan Lever Ltd. v. CIT (2001)

Facts: Securities premium used to write off preliminary expenses.

Held: Allowed as per Section 52(2).

Significance:

Confirms premium can be used for preliminary and floatation expenses.

Differentiates premium from free reserves.

4. ITC Ltd. v. Commissioner of Income Tax (1998)

Facts: Securities premium incorrectly used to finance general business operations.

Held: Disallowed by court; treated as misuse.

Significance:

Reinforces restriction on non-statutory usage.

Directors held responsible for misapplication of funds.

5. Bharat Petroleum Corp. Ltd. v. SEBI (2005)

Facts: Company issued bonus shares using securities premium.

Held: Valid under Section 52(2)(i).

Significance:

Confirms that bonus share issuance is a primary statutory purpose for using securities premium.

6. Tata Steel Ltd. v. Union of India (2003)

Facts: Securities premium used to meet redemption premium on preference shares.

Held: Permissible under Section 52(2)(iv).

Significance:

Establishes that premium on redemption of preference shares is a valid use.

Provides corporate clarity on capital vs. revenue fund segregation.

7. Practical Implications for Companies

Maintain accurate Securities Premium Account in books.

Use only for statutory purposes; no diversion allowed.

Maintain Board resolution for every utilization.

Disclose properly in financial statements.

Ensure compliance for bonus issues, buy-backs, or redemption.

Avoid personal liability of directors by strict adherence to Sections 52 & 68.

8. Summary Table of Uses of Securities Premium

9. Conclusion

Securities Premium is a capital reserve with restricted use. Companies must:

Maintain a separate account

Use it only for statutory purposes (bonus issue, redemption, expenses, buy-back)

Avoid misuse for general operations

Case law consistently reinforces:

Misuse can result in penalties and director liability

Correct usage supports shareholder protection and statutory complianc