As per Section 52 of the companies Act, 2013, the balance in the Security Premium Account cannot be utilized for
payment of dividend
Understanding Security Premium Account under Companies Act, 2013
The Security Premium Account is a capital receipt for a company. It represents the amount received by a company over and above the face value of shares or other securities issued. As per the Companies Act, 2013, this account is not a part of distributable profits and its utilization is strictly regulated by law, specifically Section 52.
Utilization of Security Premium Account: Section 52, Companies Act 2013
Section 52(2) of the Companies Act, 2013, specifies the five exclusive purposes for which the amount standing to the credit of the security premium account can be utilized. These permitted uses are:
- For writing off the preliminary expenses of the company.
- For writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company.
- For paying a premium on the redemption of any redeemable preference shares or of any debentures of the company.
- For providing for the premium payable on the redemption of any redeemable preference shares or of any debentures which are issued at a premium. (This seems redundant in Section 52(2)(c) and 52(2)(d) in the Act, but both points exist).
- For the issue of fully paid-up bonus shares to the members.
- For purchasing its own shares or other securities under Section 68 (Buy-back of shares).
It is important to note that the security premium amount is a capital reserve and generally cannot be used for distributing profits, such as paying dividends.
Analysing the Options Based on Section 52 Utilisation
Let's examine each provided option in the context of the permitted uses under Section 52:
| Option | Description | Permitted by Section 52? | Explanation |
|---|---|---|---|
| 1 | Payment of dividend | No | Payment of dividend is a distribution of revenue profits. Security premium is a capital receipt and its use for revenue purposes like dividends is expressly not permitted under Section 52. |
| 2 | Writing off discount on issue of shares | Yes | Section 52(2)(b) explicitly allows the use of security premium for writing off discount allowed on the issue of shares or debentures. |
| 3 | Issue of fully paid-up bonus share | Yes | Section 52(2)(d) (or (e) depending on enumeration) explicitly allows the use of security premium for the issue of fully paid-up bonus shares to the members. |
| 4 | Capital losses | Partially/Indirectly | While Section 52 doesn't list "capital losses" generally, it allows writing off specific capital nature expenses/losses like preliminary expenses or issue expenses/discount. Using it for *general* capital losses not related to incorporation or issue is not covered. However, compared to the clear prohibition on dividends (a revenue use), this option is less directly prohibited than dividend payment. The permitted uses are specific capital purposes. |
Conclusion on Prohibited Use of Security Premium Account
Based on the strict list of permitted uses provided in Section 52 of the Companies Act, 2013, the Security Premium Account cannot be utilized for purposes not listed. Among the given options, the 'payment of dividend' is a distribution of revenue profits and is not included in the list of permitted uses. Therefore, it is a purpose for which the balance in the Security Premium Account cannot be utilized.
Options 2 and 3 are explicitly permitted uses according to Section 52. Option 4, 'capital losses', is a broad term. While specific capital expenses related to issue/incorporation can be written off, using security premium for general capital losses is not listed as a permitted use. However, the payment of dividend is a clear distribution of revenue profits and a definite non-permitted use of a capital receipt like security premium.
Thus, the balance in the Security Premium Account cannot be utilized for the payment of dividend.
Revision Table: Security Premium Account Utilisation
| Permitted Uses (as per Section 52) | Non-Permitted Uses (Examples) |
|---|---|
| Writing off Preliminary Expenses | Payment of Cash Dividend |
| Writing off Issue Expenses/Discount/Commission | Distribution of Revenue Profits |
| Paying Premium on Redemption of Preference Shares/Debentures | Meeting day-to-day operational expenses |
| Issuing Fully Paid Bonus Shares | Paying Interest on Loans |
| Buy-back of Own Shares/Securities | General Reserve creation for revenue purposes |
Additional Information: Security Premium Account
The Security Premium Account is a crucial part of a company's financial structure. It reflects the premium received by the company when it issues shares or securities at a price higher than their face value. This premium is considered a capital receipt because it arises from a capital transaction (issue of shares) rather than from the normal revenue-generating operations of the business.
The strict regulation of its use under Section 52 ensures that this capital amount is primarily used for purposes that benefit the long-term financial health and capital structure of the company, rather than being distributed as immediate profits to shareholders in the form of cash dividends. Using it for issuing bonus shares converts this capital reserve into paid-up share capital, effectively increasing the equity base without depleting cash. Using it for buy-back reduces the share capital and extinguishes the shares, also a capital transaction.
Understanding the specific permitted uses is vital for compliance with company law and for maintaining sound financial practices.
Important Questions from The Companies Act, 2013 - Teaching
Which of the following companies cannot be a 'Small Company'?
A. A holding company or a subsidiary company
B. A company registered under Section 8
C. A company or body corporate governed by any Special Act
D. One Person Company (OPC)
Choose the correct answer from the options given below:
Which of the following does not form the part of the important information to be incorporated in the Memorandum of Association as specified in the Companies Act, 2013 ?
