Are you curious to know what is securities premium? You have come to the right place as I am going to tell you everything about securities premium in a very simple explanation. Without further discussion let’s begin to know what is securities premium?
In the realm of finance and accounting, terms like “securities premium” often surface, carrying important meanings for businesses, investors, and regulators alike. Securities premium is a concept that reflects the dynamics of raising capital through issuing shares at a value higher than their face or nominal value. In this blog post, we will delve into the world of securities premium, exploring its definition, calculations, and the implications it holds for companies and their stakeholders.
What Is Securities Premium?
Securities premium, also known as “share premium,” refers to the excess amount paid by investors for purchasing shares over their nominal or face value. The nominal value of a share is the value assigned to it when it is initially issued by a company. Securities premium arises when a company issues shares at a price higher than this nominal value, allowing the company to raise additional funds for its operations and expansion.
Calculating Securities Premium
The formula to calculate securities premium is relatively straightforward:
Securities Premium = Issue Price per Share – Nominal Value per Share
In simpler terms, the securities premium is the difference between the price at which the shares are issued and their nominal value.
Significance And Uses
- Capital Boost: Companies often issue shares at a premium to raise additional capital for funding growth initiatives, acquisitions, debt repayment, or research and development projects.
- Enhanced Value: A securities premium implies that investors perceive the company as having a strong potential for growth and profitability, which can enhance its overall market value.
- Accounting Considerations: The securities premium is recorded as a part of shareholders’ equity on the company’s balance sheet. It is not considered as revenue or income.
- Rights Issues: In certain cases, companies may offer existing shareholders the opportunity to buy new shares at a discounted price. The difference between the market price and the discounted price is accounted for as securities premium.
- Capital Reserve: The securities premium collected is often treated as a capital reserve, which cannot be distributed as dividends to shareholders. However, it can be used to write off preliminary expenses or issue bonus shares.
Implications For Investors And Companies
- Investor Perception: Securities premium can be an indicator of investor confidence in the company’s future prospects. Higher premium values suggest stronger market sentiment.
- Shareholder Equity: The securities premium contributes to the shareholders’ equity of the company, enhancing its financial strength.
- Investor Returns: While the premium is not directly distributable to shareholders as dividends, it can indirectly benefit them by contributing to the company’s financial health and growth potential.
Conclusion
Securities premium adds a layer of financial complexity to the world of corporate finance and accounting. It highlights the intricate interplay between investor sentiment, company valuation, and the dynamics of raising capital. By understanding the significance of securities premium, both companies and investors can make informed decisions that contribute to the sustainable growth and prosperity of businesses.
FAQ
What Is Security Premium And Its Uses?
Securities Premium can be used for the following purposes as per Section 52: Issue of fully paid bonus share capital. To meet the expenses that the company preliminarily incurs. To cover the costs, commissions, or discounts incurred in connection with securities previously issued by the company.
Is Securities Premium An Asset Or Liability?
The premium amount is credited to a separate account called ‘Securities Premium Account’ and Is shown on the liabilities side of the company’s balance sheet under the heading ‘Reserve and Surplus’.
What Is The Formula Of Security Premium?
Formula of Securities Premium
issued 1000 shares at 18 per share having a face value of 10 per share. Thus, In the instant case, Securities premium per share = Rs 8 (18 – 10) Total premium = Rs 8,000 (1000*8)
Why Is Securities Premium Charged?
According to Section 52 of the Act, securities premium can be used for the following purposes: For the issue of fully paid bonus share capital. For meeting the preliminary expenses incurred by the company. For meeting the expenses, commission or discount incurred concerning securities previously issued by the company.
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