Share premium is the amount received by a company over and above the face value of its shares.
Face value of a share is its value that is printed on the share certificate. For example, face value of a $1 share is one dollar. But just because the value of share is printed $1 does not necessarily mean that the share is worth only one dollar. If a company has a history of good financial performance, it can sell its shares at a price higher than the face value of the shares. This difference between the selling price and the face value of a share is known as share premium.
It is important to note that share premium arises only when the “company” sells the shares. It arises only when a company issues new equity shares. It does not arise when the “investor” sells shares at a price greater than face value. If a company sells a share whose face value is $1 at a price of $2, the company earns a share premium of $1. But subsequently if the investor sells the same share to someone else at a price of $4, no share premium will be gained by the company. The investor will benefit from this gain.
Share premium is a non-distributable reserve. The company can use it only for the purposes that are defined in the bylaws of that company. It cannot be used for purposes not defined in the company’s laws. Usually the companies are not allowed to use the share premium for payment of dividends to the shareholders and to set off the operating losses. Share premium can usually be used for paying equity related expenses such as underwriter’s fees. It can also be used to issue bonus shares to the shareholders. The costs and expenses relating to issuance of new shares can also be paid from the share premium.
Negative Share Premium
It is possible for share premium to be negative. Share premium represents the amount received by a company over and above the face value of its shares, and it is recorded in the shareholders' equity section of the balance sheet.
A negative share premium arises when a company issues shares at a discount to their nominal or face value. In this case, the amount received for the shares issued is less than the nominal or face value of the shares, resulting in a negative share premium. This can happen when a company needs to raise capital quickly and is willing to issue shares at a discount to attract investors.
It is important to note that negative share premium is not a desirable outcome for a company, as it can indicate that the company is in a weak financial position and is unable to raise capital at market rates. Negative share premium may also affect the valuation of the company and reduce the confidence of investors. Therefore, companies should aim to issue shares at or above their nominal or face value to avoid negative share premium.