Securities premium cannot be used:
to pay dividend to the shareholder of company
Understanding Securities Premium
Securities premium is the excess amount received by a company over the face value when issuing shares or debentures. This amount is credited to a separate account called the Securities Premium Account. The use of funds from this account is strictly regulated by company law.
Permitted Uses of Securities Premium
According to relevant company law provisions (such as Section 52 of the Companies Act, 2013 in India), the amount standing to the credit of the securities premium account can be applied only for specific purposes. Let's look at the legally allowed uses:
- For issuing fully paid bonus shares to the members.
- 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 providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.
- For the purchase of its own shares or other securities (buy-back).
Analyzing the Given Options
The question asks which use is not permitted for securities premium. Let's evaluate each option based on the legally allowed uses:
| Option | Description | Permitted Use? |
|---|---|---|
| 1 | For issuing fully paid Bonus shares | Yes. This is one of the explicitly permitted uses. |
| 2 | To write-off preliminary expenses of the company | Yes. Writing off preliminary expenses is another permitted use. |
| 3 | To pay premium on redemption of shares or debentures of company | Yes. Providing for redemption premium is a permitted use. |
| 4 | To pay dividend to the shareholder of company | No. Paying dividends is generally done out of the company's distributable profits, not from the securities premium account. Securities premium represents capital received over face value, not profit earned from operations. |
Conclusion on Securities Premium Usage
Based on the analysis of the options and the legal provisions governing the use of securities premium, it is clear that using securities premium to pay dividends to shareholders is not a permitted use.
Therefore, the security premium cannot be used to pay dividend to the shareholder of company.
Revision Table: Securities Premium Uses
| Allowed Uses | Not Allowed Uses (Examples) |
|---|---|
| Issuing fully paid bonus shares | Paying cash dividends |
| Writing off preliminary expenses | Distributing profits directly |
| Writing off issue expenses/discount | Funding normal operating expenses |
| Providing for redemption premium | Paying interest on loans |
| Buy-back of shares/securities | Providing loans to directors/members |
Additional Information: Section 52 of Companies Act
Section 52 of the Companies Act, 2013 specifically deals with the application of the securities premium account. It lists the limited purposes for which the amount in this account can be utilized. The intention behind these restrictions is to protect the company's capital base. Securities premium is often considered part of the capital structure, and unrestricted use could erode this capital. While it is not distributable as cash dividends, it can be converted into share capital by issuing bonus shares, thereby capitalizing the premium amount.
Understanding the distinction between capital receipts (like securities premium) and revenue receipts (like profits) is crucial in accounting and corporate finance. Capital receipts are generally not available for distribution as dividends, whereas revenue receipts, after accounting for expenses, form the distributable profits.
Important Questions from Accounting for Share Capital
Nawab, Shanaya, and Hritik are partners sharing profits and losses in the ratio of 5 : 3 : 2. The partnership deed provides for charging interest on drawings @10% p.a. The drawings of Nawab, Shanaya, and Hritik were ₹20,000, ₹15,000, and ₹10,000, respectively. After final accounts have been prepared, it was discovered that interest on drawings had not been charged. The adjusting entry will be:
Mr. Kunal withdrew ₹10,000 per month at the end of each month from a firm for his personal use during the year ending March 31, 2022. What will be the interest on drawings if charged @8% p.a.?
What are the accounting aspects that are involved at the time of retirement or death of a partner?
(A) Ascertainment of profit or loss up to the date of retirement or death of partner.
(B) Realisation of assets and liabilities that are shown in the books of Accounts only.
(C) Adjustment of capital.
(D) Calculation of new profit sharing ratio and gaining ratio.
(E) Treatment of Goodwill
Choose the correct answer from the options given below:
On retirement of a partner, the retiring partner’s capital account will be credited with:
Which of the following are shown in Revaluation A/c?
(A) Unrecorded Asset
(B) Workmen Compensation Reserve
(C) Decrease in fixed Asset
(D) Increase in Inventory
(E) Drawings of partner
Choose the correct answer from the options given below:
