Answer Posted / anuj arora

Shares are issued over the par value or at premium when the
companies have good income and reputation in the market and
general public are ready to buy the shares above the par
value and the amount of premium is decided through book
building process by biding.

The amount equal to the premium is transferred to the
securities premium account and this account can be only
utilised as per section 78(2) of the companies Act, 1956.

We can say that premium is the extra amount which the
company can take from investors due to its good income
generating capacity.
Application of funds collected as premium are specified in
Section 78 of Companies Act, 1956 which reads as follows
(1) Where a company issues shares at a premium, whether for
cash or otherwise, a sum equal to the aggregate amount or
value of the premiums on those shares shall be transferred
to an account, to be called "the 1[securities] premium
account"; and the provisions of this Act relating to the
reduction of the 1[securities] capital of a company shall,
except as provided in this section, apply as if the
1[securities] premium account were paid-up 1[securities]
capital of the company.

(2) The 1[securities] premium account may, notwithstanding
anything in sub-section (1), be applied by the company-

(a) in paying up unissued shares of the company to be
issued to members of the company as fully paid bonus shares;

(b) in writing off the preliminary expenses of the company;

(c) in writing off the expenses of, or commission paid
or discount allowed on, any issue of shares or debentures of
the company; or

(d) in providing for the premium payable on the
redemption of any redeemable preference shares or of any
debentures of the company.

(3) Where a company has, before the commencement of this
Act, issued any shares at a premium, this section shall
apply as if the shares had been issued after the
commencement of this Act.

Provided that any part of the premiums which has been so
applied that it does not at the commencement of this Act
form an identifiable part of the company's reserves within
the meaning of Schedule VI, shall be disregarded in
determining the sum to be included in the 1[securities]
premium account.

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