Over a period of time, the balance of the share premium account increases and decreases. This is because it is standard operating practice for a company to issue new shares that fall in line with the shares’ current market value instead of shares’ arbitrary par value.
There are a few steps to go through, in summary these are:
- Ensure the company’s articles allow a capital reduction.
- All directors must sign a solvency statement.
- Shareholders must approve the capital reduction via a special resolution (needing 75% of the votes) within 15 days of the solvency statement date.
Share premium is the credited difference in price between the par value, or face value, of shares, and the total price a company received for recently-issued shares.
A share premium is the amount paid for an equity in excess of its nominal value, that is; its market value less its book cost.
Simply it is the gain to the investor. Also, note that the Share Premium account is also known as Additional Paid-in Capital. It is the profit a company gets when it issues the stock for the first time in the open market.
The share premium account is usually utilized to pay off equity expenses, which include underwriter fees. The account can also be used in the issuance of bonus shares and for costs or expenses related to this issuance.
A company issues its shares at a premium when the price at which it sells the shares is higher than their par value. This is quite common, since the par value is typically set at a minimal value, such as $0.01 per share. The amount of the premium is the difference between the par value and the selling price.
Share premium: Though , as per definition of ‘free reserves’ , share premium is not ‘free reserve’ because dividend cannot be declared out of share premium. However, ‘share premium’ is considered just like free reserves for many of purposes as per specific provisions.
Share capital can be increased by issuing new shares, and by paying up issued shares in cash or in kind. Share premium can be brought into a company by a contribution in cash or in-kind on the existing shares of a company.
Key Difference – Share Capital vs Share Premium
The key difference between share capital and share premium is that while share capital is the equity generated through the issue of shares at face value, share premium is the value received for shares that exceed the face value.
As the NAV has been rising, the share premium on that particular sub fund has become negative due to large redemptions. The overall result is that the share premium is now showing a debit balance, in spite of credit balances on other sub funds, because of the very significant debit balance on the one sub fund.
(i) At the time of issue of shares, the maximum rate of securities premium is 10%.
Securities premium cannot be used as working capital. According to Section 52 (2) of the Companies Act, 2013, the securities premium can be applied only for the following purposes: (i) Issuing fully paid bonus shares to the members.
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the holder at maturity, typically in $1,000 denominations.