What is Security Premium and How it is treated?
What is the share premium account?
The amount under the share premium account represents the additional amount shareholders of a company pay on the face value (original cost) of the shares. If a firm issues one lakh shares at a face value of ₹1 but the purchase price is ₹10 per share, then its share premium account will have a balance of ₹9 lakh. Investors pay a premium to buy shares of the company based on their estimation of its future prospects.
In the financial statement of a firm, where does the share premium account fit in?
The share premium account appears on the liability side of a firm’s balance sheet after share capital (funds raised by issuing shares). Another important head is reserves and surplus which includes a portion of the profits the company has accumulated and retained over time. A company’s share capital, share premium plus the reserves, and surplus accounts form shareholders’ equity.
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Why this decision can be worrisome?
Institute of Chartered Accountants of India, the provisions of the Banking Regulation Act allow the share premium account to be used for setting off losses provided the due procedure is followed and approvals are given.
In the normal course of business, losses are set off against profits. In the absence of profits, losses are set off against reserves. Share premium is generally used for the issue of bonus shares, buyback of shares, and setting off some preliminary expenses.
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Possible Reasons for such step:
Canara Bank has been in a difficult financial position due to its mounting non-performing assets’ situation and the government, which owns 69.33% stake has imposed strict conditions on the bank for giving further capital. One of the conditions is cutting down losses and shedding non-core assets.
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What are the implications of such a move?
We point out the move amounts to a reduction in capital and is a worrisome trend. With more than 50% of listed public sector banks under prompt corrective measures, many of them are likely to follow suit. It is unfair on part of shareholders who pay a premium to buy shares of the company, he added.
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