5 Legal Ways to Use the Securities Premium Account#
When a startup or a growing company raises equity funding, they rarely issue shares at face value (e.g., ₹10). Instead, investors pay a massive premium (e.g., ₹990 premium for a total price of ₹1000 per share) based on the company's valuation.
In accounting, the ₹10 goes into the "Share Capital" account, and the ₹990 goes into a special bucket called the Securities Premium Account.
A common mistake made by young founders is assuming this cash can be used freely like retained earnings to pay dividends or cover operating losses. It cannot. Under Section 52 of the Companies Act, 2013, the Securities Premium Account is highly restricted. It can only be utilized for five specific, legally permitted purposes.
The 5 Legally Permitted Uses (Section 52(2))#
1. Issuing Fully Paid Bonus Shares#
The most common and popular use of the securities premium is to reward existing shareholders by capitalizing the premium account and issuing them free, fully paid-up bonus shares. This increases the total share capital without the shareholders having to pay any cash, and effectively locks the premium money permanently into the capital base.
2. Writing Off Preliminary Expenses#
When a company is first incorporated, it incurs "preliminary expenses" (legal fees, ROC filing fees, stamp duty). The company is legally permitted to use the funds in the Securities Premium Account to write off these initial formation expenses from the balance sheet.
3. Writing Off Issue Expenses#
Raising capital is expensive. You pay investment bankers, underwriters, lawyers, and marketing agencies. The company can use the Securities Premium Account to write off the expenses of, or the commission paid/discount allowed on, any issue of shares or debentures of the company.
4. Providing for Premium on Redemption#
If a company issues Redeemable Preference Shares or Debentures, it promises to pay back the principal amount to the investor after a certain period, often with a "premium on redemption" (an extra return). The company can utilize the Securities Premium Account to provide for this future premium payout.
5. Executing a Share Buy-Back#
Under Section 68 of the Act, if a company decides to purchase its own shares (Buy-Back) to return cash to shareholders or consolidate promoter holding, it is legally permitted to finance that buy-back utilizing the balances sitting in the Securities Premium Account.
The Strict "Capital Reduction" Rule#
What if a company uses the Securities Premium Account for anything else—like declaring a cash dividend to shareholders or writing off trading losses?
Section 52(1) explicitly states that any utilization outside these 5 specific purposes will be treated legally as a Reduction of Share Capital (governed by Section 66).
A formal Reduction of Share Capital is a notoriously difficult, expensive, and lengthy process requiring the explicit approval of the National Company Law Tribunal (NCLT) and the consent of the company's creditors.
Therefore, CFOs and founders must ring-fence the Securities Premium Account in their books. It is high-value capital, but its deployment must strictly conform to the 5 permitted avenues of Section 52.
Securities Premium vs. Free Reserves: Why the Distinction Matters#
Founders sometimes treat every credit balance sitting in reserves as interchangeable. It isn't. The table below shows why the Securities Premium Account is fundamentally different from ordinary free reserves such as retained earnings or the General Reserve.
| Aspect | Securities Premium Account | Free Reserves (Retained Earnings, General Reserve) |
|---|---|---|
| Source | Premium charged over face value on issue of shares/debentures | Accumulated profits of the business |
| Governing provision | Section 52, Companies Act, 2013 | No equivalent restriction under the Act |
| Can it fund a dividend? | No | Yes, subject to the usual dividend rules |
| Can it absorb a trading loss? | No | Yes |
| Permitted uses | Only the 5 specific purposes listed above | Effectively unrestricted, subject to board/shareholder approval |
| Consequence of misuse | Treated as a reduction of share capital, requiring NCLT approval | No equivalent consequence |
The practical reason for this restriction is straightforward: securities premium represents capital contributed by investors at a valuation, not profit earned by the business. Company law treats it closer to share capital than to distributable profit, which is exactly why its use is boxed into the five purposes and why using it outside that box is treated as if the company were reducing its capital.
A Worked Numerical Example#
Assume a company issues 1,00,000 equity shares of face value ₹10 each at a price of ₹150 per share to investors in a funding round.
- Share Capital account: 1,00,000 × ₹10 = ₹10,00,000
- Securities Premium Account: 1,00,000 × ₹140 = ₹1,40,00,000
The company now has ₹1.4 crore sitting in the Securities Premium Account. Suppose, two years later, the board wants to:
- Issue a 1:10 bonus to existing shareholders — this capitalises part of the premium account into share capital and is squarely within permitted use #1.
- Write off ₹8,00,000 of issue expenses (legal fees, valuation fees, placement fees) incurred on that very funding round — permitted use #3.
- Pay a special cash dividend to reward early investors out of the same account — this is not on the permitted list. Attempting it would expose the company to the reduction-of-capital consequence described below, regardless of how reasonable the commercial rationale seems to the board.
The example illustrates the core discipline: the test is not whether the underlying purpose is commercially sensible, it is whether that specific purpose appears in the closed list in Section 52(2).
Procedural Sequence for Utilising the Premium Account#
Using the Securities Premium Account is not a purely accounting entry — it typically follows an approval sequence:
- Board resolution proposing the specific utilisation (say, a bonus issue or writing off issue expenses), referencing the permitted purpose under Section 52(2).
- Shareholder approval, where the nature of the action independently requires it — for example, a bonus issue requires shareholder authorisation under the Act's bonus share provisions, and a buy-back financed out of the premium account requires the separate shareholder approval that Section 68 itself demands for buy-backs.
- Accounting entry debiting the Securities Premium Account and crediting the relevant head (Share Capital for a bonus issue, the relevant expense/asset account for write-offs, the Capital Redemption Reserve or similar for buy-backs).
- Disclosure in the financial statements, since movement in the Securities Premium Account is a standalone disclosure item on the balance sheet and in the notes to accounts, allowing auditors and readers to trace exactly which of the five permitted purposes the utilisation falls under.
Skipping the disclosure step, or debiting the account for a purpose the board resolution didn't actually authorise, is itself a red flag in audit — independent of whether the underlying purpose was permitted.
A Nuance for Ind AS Companies#
Companies whose financial statements are prepared in compliance with the Indian Accounting Standards (Ind AS) generally do not carry a "preliminary expenses" asset on the balance sheet at all — Ind AS requires such costs to be expensed as incurred rather than deferred. As a practical consequence, the write-off routes for preliminary expenses and issue expenses tend to have limited or no application for Ind AS-compliant companies, since there is typically no deferred balance left to write off. Companies should check their own accounting policy before assuming all five routes are equally available — this is a distinction of accounting mechanics, not a difference in the legal permission itself.
What Happens If a Company Gets This Wrong#
If a company debits the Securities Premium Account for a purpose outside the five permitted uses — even inadvertently, such as absorbing an accumulated loss to present a cleaner balance sheet — Section 52(1) treats that utilisation as a reduction of share capital under Section 66. That triggers consequences most founders are not prepared for:
- NCLT approval becomes mandatory, converting what the company thought was a routine accounting entry into a formal capital-reduction proceeding.
- Creditor consent and objections must be addressed as part of that proceeding, since a capital reduction directly affects the security available to a company's creditors.
- The process is slow and public, with tribunal timelines disproportionate to what was, commercially, often a modest bookkeeping decision.
- Auditors are likely to qualify the accounts for the period in which the improper utilisation occurred, once discovered, until the position is regularised.
The cost of getting this wrong is rarely the amount involved — it is the time, legal expense, and disclosure exposure of an unplanned NCLT proceeding to fix what should have been a straightforward accounting entry.
FAQ#
Can the Securities Premium Account be used to fund working capital or operating losses? No. None of the five permitted purposes covers general business use, working capital, or absorbing trading losses. Only free reserves or fresh capital can be used for that.
Is there a monetary limit on how much of the premium account can be used for a bonus issue? The company's own reserves position and the applicable provisions governing bonus issues (including conditions on partly paid shares and existing loan/statutory dues compliance) govern how a bonus issue is structured — this is a separate compliance layer from Section 52 itself, and should be checked against the specific bonus-issue conditions in the Act rather than assumed to be unlimited.
Does declaring bonus shares out of the premium account dilute existing shareholders? No — a bonus issue is proportionate to existing holding, so every shareholder's percentage ownership stays the same; what changes is the number of shares each holds and the composition of the company's reserves.
Does this restriction apply to premium received on debentures as well as shares? Yes — Section 52 applies to premium received on the issue of both shares and debentures; the account and its restricted uses are not limited to equity issuances alone.
Can the premium account be used to write off goodwill or other intangible assets arising on an amalgamation? This sits outside the five purposes listed in Section 52(2) as such, and amalgamation accounting is instead governed by the specific scheme approved by the NCLT and the applicable accounting standard for business combinations — treating it as a routine Section 52(2) write-off without that separate basis is not a safe assumption.