Definition
A share premium refers to the amount payable for shares in a company that is issued in excess of their nominal (par) value. For instance, if a company’s share has a nominal value of $10 but is issued at $15, the share premium is $5.
Types of Share Premium
- Initial Public Offering (IPO) Premium: When a company first goes public, the price at which its shares are offered may include a premium above the nominal value.
- Follow-on Public Offering (FPO) Premium: During subsequent offerings, shares may be issued at a premium reflecting the company’s growth and profitability since the IPO.
Key Events
- Crediting to Share Premium Account: Share premiums received by a company must be credited to a share premium account.
- Restrictions on Usage: This account cannot be used for paying dividends to shareholders. However, it can be used to:
- Issue fully paid bonus shares (scrip issues).
- Write off preliminary expenses or underwriting commissions.
- Provide for the premium payable on redemption of debentures or preference shares.
The calculation of share premium can be represented by the formula:
$$ \text{Share Premium} = \text{Issue Price} - \text{Nominal Value} $$
- Nominal Value: The face value of a share as stated in the corporate charter.
- Paid-in Capital: Total amount of capital contributed by shareholders, including both nominal value and share premium.
- Scrip Issue: An issue of additional shares to shareholders, usually at no cost, instead of cash dividends.
FAQs
Q: Can share premium be used to pay dividends?
A: No, share premium cannot be used to pay dividends.
Q: How does share premium affect a company's financial statements?
A: Share premium is recorded in a separate equity account and can be used for specific purposes like issuing bonus shares.
Q: Why might investors be willing to pay a premium for shares?
A: Investors may pay a premium due to the company’s strong growth prospects, brand value, or market positioning.