Issue of shares at premium is at discretion of Issuer Company and applicant- involves capital receipt and is advantageous to company and share holders both.

[CA DEV KUMAR KOTHARI]

Issue of shares:

Issue of shares can be at face value, at premium, or at a discount. This may be subject to negotiations between company and applicants. Or this can be by way of an issue to prospective investors at predetermined rates. In that case company offers shares at given terms and an investor can accept the same by making an application for issue of shares. If an investor does not want to apply, he can refrain from applying for such shares.

Mode of issue:

Issue of shares can be in different modes like to subscribers to the memorandum of association of company (MOA), by way of right issues to existing share holders or their renounces/ nominees if permitted, by way of public issue, private placement, preferential issues etc.

Premium is a matter of negotiation:

Issue of shares at a premium is a matter of negotiation and / or agreement or offer to issue which on acceptance become an agreement,between  issuer company and investor.

Issue at premium is a forward looking decision:

In case of issue of shares to promoters, an issue at premium can be forward looking decision to make company financially stronger and healthy.  Promoters may  issue shares to themselves or their associates or even to public at premium with forward looking approach with the following advantages:

1. to keep share capital low,
2. to have  reserves high
3. to have book value per share higher
4. to have earning per share higher
5. to make it possible to declare dividend at higher rate. Dividend is paid on paid-up share capital per share and not on premium amount.
6. in future bonus shares can be issued because company has stronger capital base.
7. In future if company wants to issue shares to other joint venture partners or to public, shares can be issued at premium.
8. Share capital as well as share premium both are shareholders funds. Share premium can be used only for limited purposes one of such limited purpose is to issue free shares as bonus shares. Therefore, a company having share premium in its reserves can be expected to issue bonus shares.
9. Strong capital base, higher book value of shares - low capital and higher reserves,  higher earnings and dividend per shares etc. are  financial strength of company. It helps in raising funds by way of capital and borrowing both in future.
10. An incidental advantage is that cost of capital raised by way of share capital and premium is reduced. This is because administrative work is reduced, fees for authorized capital is to be paid only on amount of authorized share capital, number of share certificates issued are less, stamp duty payable on shares capital issued and / or share certificates issued is less, fees payable to the Registrar of companies, which depends on authorized capital is lower when share capital is low.
11. Cost of servicing capital is low because dividend is to be paid on paid-up share capital and not on premium.

Advantage to shareholders:

Share holders have a stake in company by holding shares. Advantages obtained by company also provide some corresponding advantage to share holders also. A company with stronger capital base is preferable to invest instead of a company with weaker capital base. A stronger base company is expected to bring more wealth to share holders. When a company is investor friendly, popular amongst investors, we find that price of share improves considerably because company can pay higher dividend, company has higher earnings per share (EPS), the price to book value ratio  is higher that means price is many times more than book value per share. Shareholders can expect more rewards by way of bonus shares, rights shares at lower price, preferential offers in new ventures of company which are undertaken is new company promoted by original company and its associates etc.

Revenue must consider these aspects:

Revenue must consider all these aspects from the point of view of company, its business, and its future prospects in a businesslike manner. Whether shares are issued at premium or at face value really make no difference for revenue. This is because both are capital receipts of the company and capital investment of the investor/ share holder. Unfortunately, revenue has biased mind even at legislative level, that’s why there is a provision in section 56 of the Income-tax Act, 1961 to treat  entire premium or a part of premium received as income of company in some circumstances. Securities premium is a capital receipt and not income.  This provision to treat any such capital receipt is wrong, unjustified and appears to be ultra virse the Constitution of India. Readers may refer to my articles on these aspects on this websites.