Private Equity investment and Securities Premium Account

[arvind gupta]

Dear Members,

 

In a company, there was PE investment of Rs. 50 Crores and with all the approvals in place the money in the company was brought as Rs.50,000/- by alloting 5000 preference shares at the rate of Rs.10 per share and remaining Rs.49,99,50,000/- as Securities premium on such shares.

 

Now the aforesaid amount of Rs.49,99,50,000/- was kept in securities premium account and till date the said figure (after share issue expenditure adjustment) is being reflected in the balance sheet after two years from investment. After the PE investment was received, the amount was utilised for buying machineries worth Rs. 40 Crores.

 

My query is:

1. whether as per Sec 78(1) of Companies Act, 1956, does the securities premium amount has to be maintained in a separate bank account or just in an ledger account in the books??

 

2.Can the company after receiving money in securities premium account, utilise the same for buying machineries without High Court approval? Any exception or way through which this was done?

 

Seek your suggestion urgently.

 

Thanks & Regards,

Arvind

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Refered Section:-

78.   (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 [securities] premium account”; and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the [securities] premium account were paid-up share capital of the company.

[raja karthik]

Dear Aravind,

 

Answers are here

1. whether as per Sec 78(1) of Companies Act, 1956, does the securities premium amount has to be maintained in a separate bank account or just in an ledger account in the books??

 

Imagine there is a public issue 1 share of Rs. 10 at Rs. 15 - The whole of Rs. 15 will ultimately come to some current account maintained in bank...

 

So in the books of the company Debit will be given to the concerned bank account for Rs. 15 and the credit will be given to Equity share Capital for Rs. 10 and Securities Premium account for Rs. 5.

The section requires credit of the premium amount to the securities premium account in the ledger of the company

 

2.Can the company after receiving money in securities premium account, utilise the same for buying machineries without High Court approval? Any exception or way through which this was done?

 

If u carefully read section 78(2) the word used is " the securities premium account may, notwithstanding anything in sub section (1), be applied by the company."

 

The restriction is only on applying the securities premium account not on the amount of premium collected in cash by the company.

 

As u know almost all the known companies go for public issue at high premium if they could not utilise the same for any purposes other that those in section 78 there will be no meaning for that. Isnt it ?

Even I was thinking initially like that only...

 

Thanks

Karthik

 

[arvind gupta]

That was indeed very well answered by you Sir. Thanks!

 

As goes with the present issue, I now infer that in case the securities premium amount mentioned in books is reduced other than purpose allowed [Sec 78(2)], then we need Court approval. Otherwise there is no approval required for the usage of securities premium amount received in the bank account.

 

Then what is the motive behind taking approval of court only to move entries in books when the actual securities premium amount is already used?

 

 

[raja karthik]

What I think is once the amount is credited to the "Securities Premium Account" it becomes the property of all shareholders and they are treated as if they are part of "Paid up Share Capital".

 

Since reduction of paid up share capital requires approval of court; the court approval is  necessary for reducing securities premium other than those mentioned in the 78 and also buy back.

 

If you see the items mentioned in section 78 all items indirectly or directly benefit the existing shareholders..

 

The idea is to protect the interest...

 

The money raised whether by share capital or borrowings (other than foreign  borrowings) is to conduct the business of the company. It is not in the interest to put restrictions on the money utilisation...except raised for particular purposes..

 

 

 

Regards,

[Rajesh Warrier]

 

Dear Aravind,

 

Its a very interesting query on interpretation of Section 78. A plain reading of Section 78 (2) does restrict the use of Securities Premium Account to matters specified therein.

 

As rightly pointed out by Mr. Karthik, what the Companies are doing now a days is restricting the use of account rather than the amount in the account.

 

The question which i could not conclude last time when I had the same doubt was whether it was the intention of the law makers restrict the use of amount or the account????

 

Learned members please have you comments on the same......

--
Thanks
Regards
Rajesh A
Company Secretary
Kochi
Mob: 09846874314

[arvind gupta]

Dear Members,

 

Joining hands with Mr. Rajesh, as he mentioned "whether it was the intention of the law makers restrict the use of amount or the account????" , seek your opinion on the matter.

 

[chakri hegde]

Dear All,

Further to the discussion on the utilization of Securities Premium Amount and Securities Premium Account,

I do agree with the opinion of Mr Raja Karthik.  The restrictions in Section 78 is only on applying Securities Premium Account and not on the amount of Premium.

Apart from reduction of capital, a company can use such an amount even for the purpose of meeting its Deferred Tax Liability (Ex: Adhunik Metaliks Ltd.) and also for setting off of asset impairment (Ex: Telco) but with the approval of the shareholders and after obtaining the concerned High Court Permission.

Other Members views are solicited in this matter.............

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With Best Wishes
Chakri G Hegde
Indo Nissin Foods Ltd
Bangalore

[raja karthik]

Yes,  apart from what are mentioned in section 78(2) and buy back it can be used for any purposes with the pemission of court and shareholders.

 

Even the ways mentioned in section 100 is some of the ways for reducing share capital.

 

Regards,

Karthik

 

[siddharth mittal]

Dear Arvind ,

you have posted a good question on the use of Securities Premium Account. i also have some opinion on the subject matter.If i am wrong, please do correct me.

When a company issues share on premium the journal entry a company passes is- Bank A/C    Dr.

                                                                                                                            To Equity share Capital A/c
                                                                                                                             To Securities Premium a/c

you have a question whether a company may use this security premium amount or not, this may be clear with this explanation:in company account when we pass the above mentioned entry it has two effect on the Balance sheet of the company, one on the Liability Side and one on the Assets side. In liability side we record the security premium amount in separate head known as Security Premium Account under the heading Reserve & Surplus. it simply has a explanation that the company has a credit balance in its security premium account, on the other hand as soon as a company issues shares on premium ,the company receives the whole amount which include amount of share capital as well as of security premium. we record this amount in assets side in Cash heading.and as per your query i would like to say that the company is using its CASH resources not the security premium account's amount.as u know when the issue proceed will come to tthe company no one can identify which amount was used by the company to purchase the said machinery.and as such you mentioned Sec.78(2) intention of law maker is not to cheat anybody or give room to anybody to njoy at other 's expenses. but it the proffesionals who  invent the various method to take the advantages of law, it is not illegal but it is misuse of law within its ambit, the best exmaple in this respect is Book-building process to raise share capital by a company.

 

Again dear friends it may be possible i might be wrong, if u find so, then please cirrect me.

regards

 

 

2009/7/22 raja karthik <rkart...@gmail.com>

--
Siddharth Mittal,
Lecturer,FASC ,MITS,
Laxmangarh,Sikar,
Rajasthan,09785893636

[CS.Parvathi]

Dear all

 

If the Company utisizes the fund opbtained through Securities premium account and as on the balance sheet date the Company has got say Rs. 5,00,000  in its bank account but on the liability side of the blance sheet it shows a Securities  premium account  is Rs.10,00,000/- i.e. on the face of the balance sheet it clearly appears that the company is utilized the Securities Premium Account. Will this not contravene the provisions of Section 78.

 

Please clarify.

 

 

Regards

 

[raja karthik]

Dear all,

 

I have already expressed my views on this topic...

 

I think the liablity side of the balance sheet shows the source from which moneys are raised by the company and the asset side shows where the amount is invested in.

 

You cant say that it should be available in the form of cash only.... When company does business some part of the money raised may be converted into fixed assets, some into stocks and on some company might have sufferred loss (P& L dr). Of course when u raise money by saying that it is for some specific purposes it is the responsibility to see that the same is utilized for the same purpose...

 

Apart from that I dont think there is any restriction on the utilization of the money raised by issue of shares.

 

Also the items in section 78(2) if u see carefully its just notional book adjustments and no real cash flow is involved so the intention of the legislature seems to be not on the cash raised but on the credit balance in the securities premium account..

 

Regards,

Karthik

 

[siddharth mittal]

dear all,

as Parvathi said that a company has cash of Rs. 5,00,000 in assets side and has a credit balance of Rs. 10,00,000 in Securities premium a/c , it means that a company is utilising the security premium account, i would like to say it is not so.if you clearly go through the accounting treatment of cash flow statement and Redemption of Preference shares more specifically you will find that the amount mentioned in the reserves( available for the redemption) does not match with cash in the balance sheets, at that time what would you say? and to arrange the amount for redemption a company many times raise loan to carry out the redemption . so it is clear a company is using its cash balance nothing else.

 

And i am 200% agree with Mr. karthik that it is just a notional entry. more specifically  the law scrapped the The Controller of capital Issue (CCI) and enacted the SEBI Act so that a compant can issue shares at a premium using Book- Building Process.Because THE CCI permit only 10% premium on shares.and due to this companies was not able to fulfill their cash need even after making Public issue, so when Infosys make its issue, Narayan Murthy meet the Manmohan singh to overcome this huge obstacle in raising funds.

 

So dear friend if i am wrong then pls do correct me.

regards

Siddharth

2009/7/24 raja karthik <rkart...@gmail.com>

[arvind gupta]

Many thanks to Mr. Karthik, Mr. Hegde and Mr. Siddharth Mittal for an elaborate understanding upon the captioned subject.

 

The views shared are crystal clear!

 

Best Regards,

Arvind

[raja karthik]

Dear Mr. Siddharth,

 

Thanks for new insights....

 

Regards,

Karthik

 

On 7/25/09, siddharth mittal <siddharth...@gmail.com> wrote:

[siddharth mittal]

thank you karthik.

2009/7/25 raja karthik <rkart...@gmail.com>

[sakshi]

Dear all,

I am facing the same issue and this discussion has clearly described the fact that the proceeds of Securities premium account can be utilised to purchase fixed assets etc.
can the bank balance in the SP a/c be used for payment of regular day to day expenses?
Also request the learned members to provide relevant case laws to support their opinion.

Thanks and regards
Sakshi Vaid
Company Secretary