Page 156 - CA Inter Audit PARAM

CA Ravi Taori
➢ In the given case of Air Space Ltd, it is clear that it can issue shares to its creditors when its debt is
converted into shares in accordance with approved restructuring scheme.

QNO BS (Securities Premium)- Old Course --
AIFS.13 Bhaskar CNO - AIFS-P1.040 (M19E/SM20/SM21/N22M)
New Course – (SM25)
ABC Ltd. has issued shares for cash at a premium of Rs 450, that is, at amount in excess of the nominal value
of the shares which is Rs 10 for cash. Section 52 of the Companies Act, 2013 provides that a Company shall
transfer the amount received by it as securities premium to securities premium account. Advise the means
in which the amount in the account can be applied.
OR
Y Ltd. utilised its securities premium to declare 45% dividend. State the provisions related to application of
securities premium account and comment on the statement given.
OR
Securities premium can be utilized only for certain purposes laid down in the Companies Act, 2013.
OR
Premium received on issue of shares prior to the date of Balance Sheet has been transferred to Statement
of Profit and Loss for arriving at the figure of commission payable to the managing director.
OR
The securities premium account may only 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. Comment.
Answer Shares Issued at Premium:
➢ Meaning
In case a company has issued shares at a premium, that is, at amount in excess of the nominal value of
the shares, whether for cash or otherwise, section 52 of the Companies Act, 2013 provides that a
Company shall transfer the amount received by it as securities premium to securities premium account
and state the means in which the amount in the account can be applied.

As per the section, where a company issues shares at a premium, whether for cash or otherwise, a sum
equal to the aggregate amount of the premium received on those shares shall be transferred to a
“securities premium account” and the provisions of this Act relating to reduction of share capital of a
company shall apply as if the securities premium account were the paid-up share capital of the
company.

➢ Utilization/Application of Securities Premium:
Section 52 of the Companies Act, 2013 deals with creation of Securities Premium Account for premium
received on issues of shares and its application thereon.
Section 52(2) lays down that the securities premium account may be applied by the company –
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.
in paying up unissued shares of the company to be issued to members of the company as fully
paid bonus shares;

Thus, it is clear from the above that securities premium can be utilized only for specific purposes.

➢ Section 123 of the Companies Act- Source of Dividend Payment
Further, section 123 of the Companies Act, 2013 also specifies the sources from which dividends can be
paid and requires the same to be only paid out of current/past profits or any other free reserve.
Declaration of dividends out of securities premium is not proper and, consequently, the auditor shall
have to qualify the audit report if declaration of dividends out of securities premium.

➢ Premium Received on Issue of Shares not be credited to P&l :
Premium received on issue of shares is capital receipt and should not be credited to Statement of Profit
and Loss. As per the provisions of Section 198 of the Companies Act, 2013 on calculation of profits,
www.auditguru.in 5.2