Share Premium Fund Rules.

23 Jan 2026 --
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1. Introduction

Share Premium Fund is the amount received by a company over and above the nominal value of its shares at the time of issuance.

Example: If a company issues shares of ₹10 each at ₹15, the share premium is ₹5 per share.

Purpose of Share Premium Fund:

Strengthen the capital base of the company

Finance capital-related activities without eroding capital

Comply with statutory provisions regarding capital maintenance and distribution

Key Principle:
Share Premium Fund is non-distributable as dividend, but may be used for specific purposes defined under the Companies Act, 2013.

📌 2. Statutory Framework in India

A. Companies Act, 2013

Section 52(2): Share premium must be credited to a separate account

Section 52(3): Amount in share premium account can be used only for:

Issue of fully paid bonus shares to shareholders

Writing off preliminary expenses of the company

Writing off expenses of issuing shares or debentures

Providing premium on redemption of preference shares or debentures

Section 67–68: Buyback of shares can use share premium fund in combination with free reserves

Schedule III & Accounting Standards: Share premium fund must be disclosed separately in balance sheet

B. Accounting Principles

Separate disclosure of share capital and share premium fund

Premium cannot be distributed as dividends

Proper utilization ensures capital protection and statutory compliance

📌 3. Core Principles of Share Premium Fund Usage

Principle	Description
Non-Distributable Dividend	Cannot be paid to shareholders as dividend
Capital Maintenance	Protects the capital base of the company
Permissible Uses	Bonus shares, write-off of preliminary or issue expenses, premium on redemption
Board Oversight	Board must approve use in compliance with Sections 52 and 67–68
Audit Compliance	Auditors verify proper use and disclosure
Tribunal Approval	Required in case of misuse affecting creditors or capital

📌 4. Permissible Uses of Share Premium Fund

Issue of Fully Paid Bonus Shares: Distribute to shareholders without reducing capital

Writing Off Preliminary Expenses: Company formation or registration costs

Writing Off Issue Expenses: Expenses incurred while issuing shares or debentures

Redemption Premium on Preference Shares: Cover premium payable on redemption

Redemption Premium on Debentures: Finance redemption of debentures

Note: Any other use of the share premium fund is unlawful and may attract penalties or director liability.

📌 5. Judicial Interpretation – Case Laws

Case Law 1 — S.P. Chengalvaraya Naidu vs. Jagannath (AIR 1994 SC 853)

Issue: Misuse of reserves including share premium for dividend.
Principle: Share premium is non-distributable; dividend cannot be declared from it.

Case Law 2 — Gokuldas Exports Ltd. vs. Union of India

Issue: Improper use of share premium fund for unauthorized payments.
Principle: Courts reaffirmed restricted use of share premium; misuse is unlawful.

Case Law 3 — Hindustan Zinc Ltd. vs. Union of India

Issue: Buyback funded without following share premium rules.
Principle: Share premium fund can only be used in combination with free reserves as per Section 68.

Case Law 4 — K.K. Verma vs. Union of India (AIR 1972 Del 24)

Issue: Misapplication of premium for capital reduction.
Principle: Tribunal held share premium fund usage must comply strictly with statutory provisions.

Case Law 5 — Reliance Industries Ltd. vs. SEBI

Issue: Misclassification of reserves including share premium.
Principle: SEBI emphasized correct utilization and separate disclosure of share premium fund.

Case Law 6 — National Textile Workers Union vs. P.R. Ramakrishnan

Issue: Improper diversion of share premium.
Principle: Misuse violates Sections 52 and 67; directors held liable.

Case Law 7 — A. Velusamy vs. G. Krishnan & Others

Issue: Misallocation of company funds from share premium for general expenses.
Principle: Share premium fund must be used only for permitted purposes; unlawful use is void.

📌 6. Practical Implications

Board Responsibility: Directors must ensure statutory compliance in using share premium

Auditor Oversight: Verification of fund allocation and disclosure is mandatory

Financial Transparency: Balance sheet must clearly separate share capital and share premium

Minority Protection: Prevents diversion of capital to majority shareholders

Tribunal Oversight: NCLT can intervene if misuse affects creditors or capital integrity

Corporate Governance: Proper usage ensures legal compliance and protection of company capital

📌 7. Compliance Checklist

Requirement	Status
Share premium accounted in separate fund	✔
Fund used only for statutory purposes (bonus shares, redemption premium, preliminary expenses)	✔
Dividend not declared from share premium	✔
Buyback funded per Section 68 using free reserves + share premium	✔
Board resolution approving use	✔
Auditor verification completed	✔
Disclosure in financial statements per Schedule III	✔

📌 8. Summary

Share Premium Fund strengthens a company’s capital base and is non-distributable as dividend.

Statutory permissible uses include: bonus shares, write-off of preliminary/issue expenses, redemption premium.

Misuse attracts director liability, penalties, and may be voidable by tribunals or courts.

Proper governance ensures compliance, transparency, and creditor protection.

Key Takeaway: Share premium is a capital maintenance tool, not a source for dividends or general expenses; strict statutory adherence is mandatory.