CA. Mandar Joshi

Share Premium Share premium is the amount received by a company over

and above the face value of its shares.

Face value of a share is its value that is printed on the sharecertificate.

For example, face value of a Rs. 1 share is one Rupee. Butjust because the value of share is printed Rs. 1 does notnecessarily mean that the share is worth only one Rupee

If a company has a history of good financial performance, itcan sell its shares at a price higher than the face value of theshares. This difference between the selling price and the facevalue of a share is known as share premium.

Share Premium – continued It is important to note that share premium arises only

when the “company” sells the shares while issuing newequity shares.

It does not arise when the “investor” sells shares at aprice greater than face value.

If a company issues a share whose face value is Rs. 1 ata price of Rs. 2, the company earns a share premium ofRs. 1. But subsequently if the investor sells the sameshare to someone else at a price of Rs.4, no sharepremium will be gained by the company. The investor willbenefit from this gain.

Utilisation & Accounting

Treatment of Share Premium Share premium is a non-distributable reserve

The company can use it only for the purposes that

are defined in the bylaws of that company. It cannot

be used for purposes not defined in the company’s

laws

Usually the companies are not allowed to use the

share premium for payment of dividends to the

shareholders and to set off the operating losses.

Utilsation of Share Premium Account according

to Corporate Laws

Section 52 of Companies Act 2013 prescribes that where acompany issues share at premium, it should deposit suchamount of premium in an account called “Securities PremiumAccount”.

The amount deposited in Securities Premium Account may beutilised for the purposes mentioned below: To issue bonus shares

Writing off Preliminary Expenses

Writing off the expenses of any issue of shares and debentures

In providing for the premium payable on the redemption of anyredeemable preference shares or of any debentures of thecompany

For the buyback of shares

Securities Premium Account The sum of share premium which a company receives for all past transactions of its

equities would be disclosed as a separate note in the annual accounts.

Illustration:

During the year ended 31st March 2014, 500 Ordinary Shares of Rs.1 each were

issued to ABC limited at a price of Rs.2 each. The amount received as consideration

in excess of the nominal value is shown in the share premium account and shall be

disclosed in the annual accounts as under:

Share Capital Account 31-Mar-14 31-Mar-13

Ordinary shares of Rs.1

each2,000 1,500

Securities Premium

Account500 0

Total 2,500 1,500

Bonus Shares Bonus shares are additional shares given to the current shareholders

without any additional cost, based upon the number of shares that a shareholder owns.

These are company's accumulated earnings which are not given out in the form of dividends, but are converted into free shares.

Companies issue bonus shares to encourage retail participation and increase their equity base.

When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company.

Increase in the number of shares reduces the price per share. But the overall capital & net worth of the company remains the same even if bonus shares are declared.

Advantages of Issue of Bonus Shares

Shareholders get their undistributed profits as bonusshares

Issue of bonus shares keep the stakeholders happy.

By issuing bonus shares, the company is able toincrease the morale and motivation level of thestakeholders

By issuing bonus shares, it increases the marketabilityof the shares

Disadvantages of Issue of Bonus Shares

The companies encourage speculative dealings in shares

by issuing bonus shares.

Issue of bonus shares is a very lengthy process. It

requires the approval of SEBI & number of other

compliance which might delay in the issue of shares.

Procedure & Accounting Treatment for

issue of Bonus Shares Bonus shares can be issued by a company by utilising the balance in

the Free Reserves such as Profit & Loss Account, General Reserveand other reserves such as Capital Reserve, Capital RedemptionReserve and Securities Premium Reserve.

Since the Bonus issue is made without any cost to the existingshareholders, the company will be incurring the cost to issue theBonus Shares

Issue of bonus shares is not made with the intension of generatingfunds, but with the intension of making the shareholders happy andincreasing the share capital

Thus, in this process, accounting is done only to transfer theunutilised balance in Reserves to Share Capital Account, therebyincreasing the Share Capital.

Journal Entries for Issue of Bonus

Shares Upon the sanction of issue of bonus shares

Debit Profit & Loss Account

Debit General Reserve

Debit Capital Reserve Account (To the extent Available in Cash)

Debit Securities Premium Account

Credit Bonus to Shareholders Account

Upon Issue of Share

Debit Bonus to Shareholders Account

Credit Share Capital Account

Journal Entries for Issue of Bonus

Shares

IllustrationFollowing items appear on the Balance Sheet of ABC Limited as on 31st March 2014

Particulars Rs.

40,000 Equity Shares of Rs.10 each 4,00,000.00

Capital Reserve (including Rs.30,000 being profit on sale of machinery) 75,000.00

Capital Redemption Reserve 25,000.00

Securities Premium 30,000.00

General Reserve 1,05,000.00

Profit & Loss Account 50,000.00

The company decides to issue bonus shares in the ratio of 1 share for every 4 held.

Pass necessary journal entries.

Journal Entries for Issue of Bonus

SharesSolution

Journal Entries in the Books of ABC Limited

L/F Dr. Cr.

Rs. Rs.

Capital Reserve 30,000.00

Capital Redemption Reserve 25,000.00

Securities Premium 30,000.00

General Reserve 15,000.00

To Bonus to Shareholders Account 1,00,000.00

(Bonus issue in the ratio of 1 for 4 held, by utilising various reserves as per board

resoluion dated….)

Calculation of number of bonus shares to be issued

Existing number of shares 40000

Ratio 1:4

Number of bonus shares to issue 40000 X 1

4

=10,000

Amount to be utilised @ Rs.10 per share 4,00,000.00

Bonus to Shareholders A/c 1,00,000.00

To Equity Share Capital Account 1,00,000.00

Balance Sheet Extract after issue of bonus shares

Particulars Rs.

50,000 Equity Shares of Rs.10 each 5,00,000.00

Capital Reserve (including Rs.30,000 being profit on sale of machinery) 45,000.00

General Reserve 90,000.00

Profit & Loss Account 50,000.00

Few Additional Concepts Capital Reserve: A type of account on a company's

balance sheet that is reserved for long-term capitalinvestment projects or any other large and anticipatedexpense(s) that will be incurred in the future.

Thus the utilisation of capital reserve is restricted for longterm projects by the articles of the association

Capital redemption reserve: Capital Redemption Revereis an reserve created when a company buys it ownsshares which reduces its share capital. This reserve isnot distributable to shareholders and can be used to paybonus shared issued.