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Can Securities Premium/ Share Premium be used for working capital or purchasing assets?

20 August 2020

Companies Act 2013 mentions u/s 52:

[....] The securities premium account may be applied by the company—

towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;
in writing off the preliminary expenses of the company;
in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;
in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or
for the purchase of its own shares or other securities under section 68.

Does this mean I cannot use the share premiums received for any other purpose - like working capital, buying machinery, paying off some of the debt, ......?

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Pradyumna Nag (29 Points)
Replied 20 August 2020

My 2 cents are as follows.

'Utilization of proceeds' and 'Application of an account' are 2 very very different things.

'Application of an account'
means how the premium account can be used once it is already a part of the Balance Sheet. Say, for conversion to a free reserve from a restricted reserve.

'Utilization of proceeds'
means how the proceeds of an issue can be utilized - which is not mentioned anywhere in the Companies Act.

It is obvious that the law does not intend to restrict how you are able to use the same.

If this was the case, Companies who issue shares, let's say, in a listing (IPO) - would never issue shares at a Premium if they wouldn't be able to use the proceeds. Issuing at FV would discount all the effort that the company & its management has made till date in building a valuable business as they will get diluted down drastically.

Let's take an example:

Rossari Biotech Ltd issued 1,16,76,471 shares (face value of Rs. each) at a price of INR 670 per share.

Objectives of the issue:
1. Repayment of certain indebtedness
2. Funding working capital requirements
3. General corporate purposes

Applying this confusion would mean that the company can apply INR 2.34 Cr and retain the rest of the Rs. 780 Cr for these objects?

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The intention of the law is to ensure that Companies do not use the Securities Premium Account to cover operating losses and dress up balance sheets or otherwise try capital structuring exercises that can make the Balance Sheets misleading.

Hence, the bottom-line is:

- Use of the premium amount received on securities is allowed as decided by the BOD for the business objects of the company.
- Application (use for setting off, conversion to other kinds of reserves or adjustments of balance sheet items) of Securities Premium Account is restricted to the defined purposes in Sec 52.

Would love to hear is someone has a better answer to this.

I saw a lot of misleading text and suggestions all across the internet (including an article of Economic Times! where the author did not understand this difference). Thought I should try and add my opinion and help those confused on this topic.

Hope to write a lot more in the future.

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