Question

Define securities premium. (Answer in one sentence)

Answer 1

As per the Section 78 of the Companies Act of 1956, the amount of securities premium can be used by the company for the following activities:

1. For paying up un issued shares of the company to be issued to members (shareholders) of the company as fully paid bonus share,

2. For writing off the preliminary expenses of the company,

3. For writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company,

4. For paying up the premium that is to be payable on redemption of preference shares or debentures of the company.

5. Further, as per the Section 77A, the securities premium amount can also be utilised by the company to Buy-back its own shares.

Answer 2

Security premium account is part of Shareholders Fund , it refers to the difference between market value and face value of the share.

For example if the face value of share is 100 and market value is 600 then those extra 500 will be transferred to security premium account.

Security premium account can not be used for distribution or writing off operating losses of company but it can be used for writing off equity related expenses.
I hope this help u