When a business decides to sell its shares for a price greater than the nominal value, it cannot simply consider the difference as "extra money" to be used at will. According to the Indian company law, this surplus is a separate entity with a definite objective and has to comply with various regulatory requirements. The moment it becomes significant is when the part of the law dealing with the issue, i.e., Section 52 of the Companies Act, 2013, comes into the picture. .
Quite a few founders and directors are under the false impression that the extra amount received on the issue of shares can be utilized in the same way as the regular profits. Such an idea may result in breaches of the law very often. To back up this assertion, section 52 distinguishes clearly in legal terms between revenue profits and capital receipts and details the treatment of funds raised through share premium.
It is vital for any company, be it a startup, a private company, or a large corporate, to comprehend this section when they are in need of capital..
What Is Section 52 of the Companies Act, 2013?
Section 52 of the Companies Act, 2013 pertains to how the money received from the share issuance above the face value is utilized. When a company issues shares at a price that is more than the nominal or face value, the extra amount that is raised is known as share premium..
The law mandates that this premium must be transferred to a separate account known as the Securities Premium Account. This account is treated as a capital reserve and not as free surplus. Unlike profits earned from operations, share premium cannot be distributed casually or used for general business expenses."
This provision ensures financial discipline and protects shareholder interests by preventing misuse of capital funds.
Also Read: Tax on Money and Property Received
Meaning of Premium Received on Issue of Shares
The premium on the issue of shares is the additional amount that the company collects from the shareholders over and above the nominal value of the shares. For instance, if a share of a face value of ₹10 is offered at ₹100, then the extra ₹90 is termed as share premium..
According to the Companies Act of 2013, the amount by which the issue price exceeds the face value of a share is not part of the profits and losses account. Rather, it is a capital receipt which makes the company’s balance sheet stronger. The reasoning behind it is quite straightforward. Investors pay a premium as they are convinced about the long-term value of the company and not for immediate benefits like dividends.
Securities Premium Account: Mandatory Compliance Under Section 52
Section 52 clearly states that every company must transfer the share premium amount to a Securities Premium Account. This account carries the same status as paid-up share capital.
After the credit is given, the money is not allowed to be taken out in a casual manner. The way it is used is monitored very closely by the law just like the way capital is guarded from erosion. In this way, the money obtained from the investors is guaranteed to be kept in the company for its stability in the long run instead of being taken out via illegal transactions..
Permitted Uses of Securities Premium Account Under Section 52
One of the most critical aspects of Section 52 of the Companies Act, 2013 is that it specifies where share premium can be used. The law allows utilisation only for capital-related purposes.
The securities premium account can be used for:
⦁ Issuing fully paid bonus shares
⦁ Writing off preliminary expenses"
⦁ Writing off expenses, commission, or discount on issue of shares or debentures
⦁ Paying premium payable on redemption of preference shares or debentures
⦁ Buy-back of shares as per law
Any use outside these purposes is strictly prohibited.
What Section 52 Clearly Prohibits
The biggest misconception is about dividends. Share premium cannot be used to pay dividends. This is expressly barred under Section 52.
Why? Because dividends represent distribution of profits, while share premium is a capital receipt. Mixing the two would defeat the purpose of investor protection. Using premium money for routine operational expenses, director remuneration, or revenue losses is also not permitted.
Violation of this rule can attract penalties and regulatory action against the company and its officers.
Why Section 52 Is Different from Other Compliance Provisions
It is important not to confuse Section 52 with procedural sections like section 139(2) of companies act 2013, which deals with auditor rotation. While Section 139(2) focuses on governance & independence, Section 52 focuses on capital protection.
Both sections operate in completely different domains of corporate law. However, they share a common objective—ensuring transparency, accountability, and long-term trust in corporate structures.
Applicability of Section 52 Under Companies Act, 2013
Section 52 applies to all companies—private companies, public companies, listed entities, & startups. There is no exemption based on size or turnover.
Irrespective of a company's decision to raise funds via private placement, rights issue, or public issue, the moment shares are issued at a premium, it is obligatory to follow Section 52. The compliance with these regulations is also necessary for any seed-stage startups obtaining angel or VC funding.
Accounting Treatment of Share Premium
From an accounting perspective, the securities premium account appears under the “Reserves & Surplus” section of the balance sheet but is categorised as a capital reserve.
Auditors closely scrutinise transactions involving this account. Any incorrect debit or improper adjustment can lead to audit qualifications, regulatory notices, or even reopening of financial statements.
Penalties for Misuse of Securities Premium
Non-compliance with Section 52 of the Companies Act, 2013 can invite penalties under general penal provisions of the Act. Directors may be held personally liable if funds are misapplied knowingly.
Additionally, such violations can impact future fundraising, investor confidence, and valuation, especially for startups planning institutional rounds.
Practical Examples for Better Understanding
Say a startup decides to raise ₹10 crore by issuing shares of ₹1 face value at ₹100 each. In this case, ₹99 per share will be credited to the securities premium account. The money in that account is not allowed to be spent on salaries or rent. However, it can be utilized in the future for the issuance of bonus shares or to finance a buy-back that complies with the law.
This distinction is where many companies slip—and where Section 52 protects both investors and the company itself.
Why Section 52 Matters for Founders and Investors
For founders, Section 52 ensures discipline in capital management. For investors, it ensures their premium investment is protected and not eroded through short-term spending decisions.
In the long run, strict adherence improves corporate credibility, simplifies audits, and avoids regulatory complications.
Final Thoughts: Capital Is Not Free Cash
Section 52 of the Companies Act, 2013 is very explicit in its communication that the money obtained as a share premium should be considered as a holy capital and not as a disposable income. The companies which are aware of this regulation and still, willingly abide by it, end up having solid financial bases & gaining the trust of investors for a long period of time.
Ignoring this provision can be costly. Following it can be a strategic advantage.
Need expert help with share issue, securities premium compliance, or end-to-end Companies Act filings? Visit Callmyca.com for professional, hassle-free corporate compliance support.
