By Siddharth Dalabehera
The term ‘Securities’ under Section 2(81) of the Companies Act, 2013 has been defined to mean ‘securities’ as defined in Clause (h) of Section 2 of the Securities Contracts (Regulation) Act,
’56 (SCRA). The term ‘securities’ include: shares, scrips, stocks, bonds, debentures, debenture stock and other marketable securities of a like nature in or in any incorporated company or body corporate.’
If the market exists, a company may issue its shares or securities at a price higher than its nominal value. There is no restriction whatever on the sale of shares at a premium in Companies Act which is silent about the same and only lays down the restrictions regulating the issue of shares by a Company at premium. But SEBI guidelines have to be observed as they indicate when an issue has to be at par and when premium is chargeable.
As per SEBI guidelines, an issuer can issue shares at any price. However, offer document should indicate justification for the price. Thus, issuer can’t issue share at a price that the market can’t bear. In case of private issue, SEBI guidelines do not apply. Shares at a Premium may be received in cash or in kind. Where the value of the assets received by a company as a consideration for allotment is greater than the nominal value of shares, it is, in essence, an allotment at a premium. So a company may issue securities at a premium when it is able to sell them at a price above par or above value, for example, Rs. 100 per share at a price of Rs. 120, thereby earning a premium of Rs. 20 per share.
The researcher focuses only over Section 52 (corresponding to section 78 of The Companies Act, 1956) of The Companies Act, 2013 which enunciates the restrictions regulating the utilization of the amount of premium collected on such securities.
Securities Premium Account & its Reduction
Section 52(1) of the Companies Act, 2013 regulates the disbursement of the amount collected as premium. It is clearly provided that the amount so received whether in cash or kind, shall be carried to a separate account to be known as The Securities Premium Account (SPA). In Head (Henry) & Co Ltd v Ropner Holdings Ltd, the Court held that An amount equal to the extra value of assets would have to be carried to the SPA.
The amount to the credit has to be maintained with the same sanctity as share capital. In Thorn EMG plc Case, the court held that the amount of securities premium can be reduced only in the manner of share capital. The decision of the Court below in Ransomes plc, re, affirmed the decision of the court below in sanctioning reduction of share premium account irrespective of irregularities like short notice of meeting, increasing the number of shareholders to assure smooth passage of the resolutions and highly abbreviated notice, because the interests of the shareholders were not prejudiced there being otherwise good resources for paying them back in full in case of need.
The SPA can be only reduced if the Articles of Association authorizes it and a special resolution with consent as may be required by the law. Reduction in Share Capital Account will also entail a reduction in Securities Premium Account. Both have to tally if shares have been issued at premium.
In Hyderabad Industries Ltd., In re, reduction of the SPA for wiping out losses incurred in trading in securities was allowed. The Articles of Association enabled the company to reduce its SPA. The reduction of capital didn’t involve either diminution of liability in respect of unpaid capital or payment to any shareholder of paid-up capital. the court held that Unless and until there is a diminution of the share capital and corresponding reduction of the share premium account, no company can be allowed to write off or adjust the loss against share premium account..
In India Infoline Ltd, re, The Company proposed to write off accumulated losses by utilizing the SPA and by reducing the face value of its shares. The need and purpose of the reduction was duly explained and discussed at an extraordinary general meeting at which a special resolution was unanimously passed. The company had no secured creditors. The unsecured creditors have given their written consent. Nothing was shown to be there either against public interest or against law. The court, in this case, allowed the proposed reduction.
In Global Trust Bank Ltd, re, the Court held that the SPA is treated as a paid-up share capital for a limited purpose. But not as a reserve fund. A company can be allowed to write off or adjust a loss against SPA if there is no diminution of the SPA and corresponding reduction in the SPA.
Utilization of SPA
Section 52(2) entails the liberty by which the SPA can be used in the following five ways:
- 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.
The court in Drown v Gaumont- British Picture Corpn Ltd, and catena of cases the court held that the SPA cannot be treated as profit and, therefore can’t be distributed as dividend. However, the same can be capitalized and distributed in form of bonus shares. Section 63 (1)(ii) of the Companies Act, 2013 also provides that SPA can be utilized to issue fully paid bonus shares. In EIC Services Ltd v. Phipps, the court held that the bonus shares weren’t allowed to be issued by capitalization of the SPA without authority of an ordinary resolution of the company and to shareholders whose shares weren’t fully paid. It couldn’t be regularized by an agreement of the shareholders. The DCA is of the opinion that the amount of premium cannot be treated as a free reserve as it is in nature of a capital reserve.
In Hill Crest Realty v. Ram Parshotam Mittal , the company wanted to utilize the SPA for upgrading the business, renovations etc. It was held that if the account is to be used for any other purpose other than specified in section 78 of Companies Act, 1956, the procedure as prescribed in the Act for reduction of share capital is required to be followed.
In Comat Infoscribe P Ltd. In re, it was held that while sanctioning scheme of amalgamation, reduction of SPA as a reduction in capital is permissible. However, if such reduction is not for purposes as stipulated in section 78(2) of the Companies Act, 1956, the procedure as prescribed in the Act for reduction of share capital is required to be followed. In Zee Tele films Ltd, re, the court held that a reduction of the SPA is allowed under a scheme which experts had approved as fair, just and proper.
In Hyderabad Industries Ltd., In re, the court held that unless the Articles of Association permit utilization of share premium account for purposes other than those mentioned in Section 52 (2), the court can’t approve the resolution to that effect. For utilization of the Securities Premium Account for purposes mentioned in Section 52(2), no approval or sanction of the court is required.
In DSM Anti Infectives India Ltd. In re it was held that SPA can be applied for the purposes other than section 78 (2) of the 1956 Act while approving a scheme under section 391 of the 1956 Act ( Section 230 of the 2013 Act). In this case utilization of SPA towards business construction reserve was allowed.
In Nestle India Ltd. In re a special resolution was passed in a meeting of members approving a scheme of utilizing the amount in SPA to distribute the same to members as ‘special dividend’. Secured creditors had approved the scheme and unsecured creditors had raised no objection. The scheme was approved by the court. The Rajasthan High Court in Mangalam Cement Ltd.,  has held that a company can utilize credit balance in securities premium account for purpose of meeting deferred tax liability.
The New Provision
Subsection (3) of section 52 is a new provision which wasn’t earlier there in Section 78 of the Companies Act, 1956. Section 52 (3) provides that SPA may also be applied to such classes of companies as may be prescribed and whose financial statements comply with accounting standards prescribes for such classes of companies under Section 133 for the following:
(a) in paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or
(b) in writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company; or
(c) for the purchase of its own shares or other securities under section 68
It can be concluded that the issue of securities at premium has many restrictions in its utilization. Firstly, the premium can’t be treated as profit and therefore, cannot be distributed as dividends. Secondly, the amount of premium, whether received in cash or in kind, must be recorded in a separate account i.e.; SPA. Thirdly, the amount of share premium is to be maintained with the same sanctity as the share capital. The SPA can be reduced only if there is authorization by Articles of Association and has to be reduced in a way as the share capital is reduced. The SPA can’t be treated as profit and can’t be distributed as dividends but can be distributed in form of bonus shares. There has been an inclusion of a new provision which is concerned about certain specific classes of companies.
Formatted on 14th February 2019.
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