Share Premium Calculator
Calculate the share premium amount based on issue price, face value, and number of shares.
Comprehensive Guide: How to Calculate Share Premium
The share premium account represents the difference between the issue price of a share and its face value. This comprehensive guide explains the calculation methodology, accounting treatment, and regulatory requirements surrounding share premium.
1. Understanding Share Premium Basics
Share premium arises when a company issues shares at a price higher than their face value (also called nominal value or par value). This premium amount cannot be distributed as dividends and must be maintained as part of the company’s reserves.
Key Definitions:
- Face Value: The nominal value of a share as stated in the company’s memorandum
- Issue Price: The actual price at which shares are sold to investors
- Share Premium: The difference between issue price and face value
- Authorized Capital: The maximum share capital a company can issue as per its constitutional documents
2. Step-by-Step Calculation Process
Calculating share premium involves these key steps:
- Determine Face Value: Identify the nominal value per share as stated in the company’s articles of association. In India, the Companies Act 2013 doesn’t specify a minimum face value, but ₹1, ₹2, ₹5, ₹10, and ₹100 are common denominations.
- Set Issue Price: The board of directors determines the issue price based on market conditions, company valuation, and investor demand. This is typically higher than the face value for established companies.
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Calculate Premium per Share: Subtract the face value from the issue price to get the premium per share.
Formula:Premium per Share = Issue Price - Face Value -
Compute Total Premium: Multiply the premium per share by the total number of shares issued.
Formula:Total Share Premium = Premium per Share × Number of Shares
3. Practical Calculation Example
Let’s consider a practical example to illustrate the calculation:
| Parameter | Value | Calculation |
|---|---|---|
| Face Value per Share | ₹10 | – |
| Issue Price per Share | ₹25 | – |
| Number of Shares Issued | 50,000 | – |
| Premium per Share | ₹15 | ₹25 – ₹10 = ₹15 |
| Total Share Premium | ₹750,000 | ₹15 × 50,000 = ₹750,000 |
| Total Amount Received | ₹1,250,000 | ₹25 × 50,000 = ₹1,250,000 |
4. Accounting Treatment of Share Premium
The share premium amount must be properly recorded in the company’s books of accounts. According to the Companies Act 2013 and accounting standards:
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Journal Entry: When shares are issued at a premium, the accounting entry would be:
Bank A/c Dr. [Total Amount Received]To Share Capital A/c [Face Value × Number of Shares]To Securities Premium A/c [Premium Amount] - Balance Sheet Presentation: The share premium appears under “Reserves and Surplus” in the balance sheet, separately from the share capital.
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Utilization Restrictions: The Securities Premium Account can only be used for specific purposes as per Section 52 of the Companies Act 2013:
- Issuing fully paid bonus shares
- Writing off preliminary expenses
- Writing off commission/expenses of issue
- Providing for premium on redemption of debentures
- For buy-back of own shares
5. Regulatory Framework in India
In India, the calculation and utilization of share premium are governed by:
- Companies Act 2013: Sections 52 and 53 specifically deal with the securities premium account and prohibition on issue of shares at discount.
- SEBI (ICDR) Regulations 2018: For listed companies, the Securities and Exchange Board of India regulates the pricing of issues.
- Accounting Standards: AS-14 (Accounting for Amalgamations) and Ind AS 32 (Financial Instruments: Presentation) provide guidance on share premium accounting.
| Aspect | India (Companies Act 2013) | United Kingdom (Companies Act 2006) | United States (Generally Accepted Accounting Principles) |
|---|---|---|---|
| Minimum Face Value | No minimum (commonly ₹1, ₹10) | No minimum (commonly £0.01, £1) | No par value shares permitted in most states |
| Premium Account Name | Securities Premium Account | Share Premium Account | Additional Paid-in Capital |
| Utilization Restrictions | Section 52 specifies permitted uses | Can be used to write off expenses, issue bonus shares | Generally no restrictions on use |
| Tax Treatment | Not taxable as income | Not taxable as income | Not taxable as income |
6. Common Mistakes to Avoid
Companies often make these errors when calculating and accounting for share premium:
- Incorrect Face Value: Using the wrong face value as stated in the memorandum of association. Always verify the authorized share capital details.
- Premium Calculation Errors: Simple arithmetic mistakes in subtracting face value from issue price or multiplying by number of shares.
- Improper Accounting: Recording the entire proceeds as share capital instead of separating the premium component.
- Unauthorized Utilization: Using the securities premium account for purposes not permitted by law, such as distributing dividends.
- Disclosure Omissions: Failing to properly disclose the share premium in financial statements and annual reports.
7. Advanced Considerations
For complex transactions, additional factors may affect share premium calculations:
Right Issues and Bonus Shares:
When companies issue rights shares or bonus shares, the premium calculation may involve:
- Adjusting the issue price based on market value
- Considering the existing share premium account balance
- Complying with SEBI regulations for listed companies
Foreign Currency Issues:
For companies issuing shares to foreign investors:
- Convert foreign currency amounts using the RBI reference rate
- Consider FEMA regulations for foreign direct investment
- Account for any forex fluctuations between subscription and allotment
ESOP and Sweat Equity:
Employee stock options and sweat equity may involve:
- Special valuation requirements under Companies Act
- Different accounting treatment for the premium component
- Tax implications for both company and employees
8. Expert Recommendations
Based on industry best practices, we recommend:
- Maintain Proper Documentation: Keep board resolutions, valuation reports, and allotment records to support the premium calculation.
- Regular Reconciliation: Periodically reconcile the securities premium account with share allotment records.
- Professional Valuation: For complex issues, engage a registered valuer to determine the fair issue price.
- Compliance Audit: Conduct regular audits to ensure compliance with Companies Act and SEBI regulations.
- Investor Communication: Clearly disclose the premium calculation methodology in the offer document or private placement memorandum.
9. Frequently Asked Questions
Q1: Can share premium be used to pay dividends?
Answer: No, the Companies Act 2013 explicitly prohibits using the securities premium account for dividend payments. The premium can only be used for specific purposes mentioned in Section 52.
Q2: What happens if shares are issued at a discount?
Answer: Issuing shares at a discount to face value is generally prohibited under Section 53 of the Companies Act 2013, except for sweat equity shares issued under Section 54.
Q3: How is share premium different from share capital?
Answer: Share capital represents the face value of shares issued, while share premium is the amount received in excess of the face value. They are accounted for separately in the balance sheet.
Q4: Is share premium taxable?
Answer: Share premium is not considered taxable income for the company. However, certain transactions involving share premium may have tax implications under the Income Tax Act.
Q5: Can a company have negative share premium?
Answer: No, share premium cannot be negative. If shares are issued at face value, the premium would be zero. A negative value would imply a discount, which is generally not permitted.
10. Authoritative Resources
For official guidance on share premium calculations and regulations: