Issue of Securities at a Premium
A company may issue securities at a premium when it is able to sell them at a price above par or above nominal value. The Companies Act, 2013, does not stipulate any conditions or restrictions regulating the issue of securities by a company at a premium. However, the Companies Act does impose conditions regulating the utilization of the amount of premium collected on securities.
Share Premium to be transferred to ‘securities premium account’
Section 52 (1) states that when 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, except as provided in this section, apply as if the securities premium account were the paidup share capital of the company.
Utilisation of Securities premium
In accordance with the provisions of Section 52(2) of the Act, the securities premium can be utilised only for:
(a) issuing fully paid bonus shares to members;
(b) writing off the balance of the preliminary expenses of the company;
(c) writing off commission paid or discount allowed, or the expenses incurred on issue of shares or debentures of the company;
(d) for providing for the premium payable on redemption of any redeemable preference shares or debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.
Section 52(3) further states that the securities premium account may, notwithstanding anything contained in sub-Sections (1) and (2), be applied by such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133,—
(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.
Firstly, the premium cannot be treated as profit and as such the amount of premium is not available for distribution as dividend. Secondly, the amount of premium whether received in cash or in kind must be kept in a separate account, known as the “Securities Premium Account”. Thirdly, the amount of premium is to be maintained with the same sanctity as the share capital.
Where a company issues shares at a premium, even though the consideration may be other than cash, a sum equal to the amount or value of the premium must be transferred to the securities premium account. [Head (Henry) & Co. Ltd. v. Ropner Holding Ltd. (1951) 2 All ER 994: (152) Ch 124 (Ch D)].
Any premium paid does not give the shareholder any preferential rights in case of a winding up. Monies in the securities premium account cannot be treated as free reserves, as they are in the nature of capital reserve [See Departmental Circular No. 3/77 dated 15.4.1977].
What is Call on Shares?
Definition: A call may be defined as "A demand made by the company on its share holders to pay whole or part of the balance remaining unpaid on each share at any time during the life time of a company".
For example : The price of a share is Rs.100/-. At the time of applying for shares, the investor has to pay Rs.5/- of the nominal value of share i.e. Rs.5, so Rs.95/- is balance on each share. As and when the company needs money its asks its share holders to pay, suppose the company asks its shareholders to pay
per share, that is known as calls on shares.
Procedure regarding calls on shares:
(1) Board Meeting for passing a call resolution: A meeting of the Board of Directors will be called. In this meeting a resolution will be passed regarding making a call. The resolution must specify the amount of
call money, the date and place of its payment.
(2) Closing of the Register of member and the Share Transfer Book: In the same Board meeting a resolution is passed, whereby the secretary is given permission to close the transfer book and the register of members for a period of about 15 days.
(3) Preparing the call lists: After closing the transfer book, the work of preparing the call lists from the register of member, is under taken by the secretary. A call lists shows details like name and address of the share holders, numbers of shares held by them, the amount due on the call etc. This helps the secretary in sending call letters to the members.
(4) Drafting call letters: The secretary prepares a draft of the all letter in consultation with the chairman of the company. He gets the call letters printed in the required quantity. A call letter is divided into three parts. They are: (i) A call letter proper, (ii) A call receipt, (iii) A call slip.
(5) Issuing call letters / Dispatch of call notice: After the preparation of call lists, the secretary issues a call letter to the share holders on their registered address. He also publishes a call notice in a leading newspaper for the information of shareholders.
(6) Arrangement with bankers for call money: The has to make necessary arrangement with the bankers of the company to receive call money from the members. Accordingly instructions are given to the bankers. The amount receive on calls is credited to a separate account called a "Call Account". After receiving the call money, bankers arrange to send the amount to the company. The call letter and call receipt are returned to the shareholder with necessary entries, signature and stamp.
(7) Entries in the call list and the register of members: After receiving the call money, bankers return call letter and call receipt to the members and send all call slips to the company's office. The secretary then makes entries against the respective names in the call lists and the register of members.
(8) Preparing list of Defaulters: The secretary prepares a list of those members who have not paid the call money on the stipulated date. Such a list is called a list of defaulters. It is placed before the Board for necessary action. Unpaid call money by members is called as "Calls in Arrears".