Share premium
Also written Share premium account
The amount a company receives over the face value of a share when it issues shares above par — Rs 40 on a Rs 10 share sold at Rs 50. It is capital raised, not profit.
In plain language
Every share has a face value, fixed when the capital is divided up — Rs 10, Rs 5, Re 1. It rarely has anything to do with what the share is worth.
A young company with good prospects can ask investors to pay far more than face value for a new share. The workbook puts it simply: companies issue shares at face value or at higher prices depending on the future prospects of the company. The face value goes into share capital. The excess over face value is the share premium.
So when a company sells a Rs 10 share at Rs 50, it has raised Rs 50 of money, but only Rs 10 of it shows up as share capital. The other Rs 40 is premium — real money, contributed by shareholders, not earned by the business.
How it works
The workbook's Example 2: a company issues 1 lakh equity shares of face value Rs 10 at Rs 50 — face value (par value) Rs 10, share premium Rs 40 per share.
Where it matters for a registrar and an investor:
- Capital figures are at face value. Issued and paid-up capital count only the Rs 10; the premium sits separately. So does the authorised capital ceiling — it is never consumed by premium.
- Dividends are declared on face value. The workbook's rule: a 40 percent dividend on a Rs 10 share is Rs 4, whatever the share was issued at. That is why SEBI requires listed companies to declare dividends in rupees per share, so investors are not misled by a percentage on face value.
- The premium can fund a buy-back. A company may buy back its shares out of free reserves, the share premium account, or the proceeds of securities issued — but not out of the proceeds of an earlier issue of the same class of securities being bought back.
- Issue at a discount is the exception. Shares may be issued below face value only in special cases.
In a book-built IPO the premium is not known until the cut-off price is fixed after bidding closes — the face value is fixed, the issue price is discovered, and the premium is the gap between them.
The formula
Share premium per share = Issue price − Face value
Total share premium = Shares issued × (Issue price − Face value)
Dividend per share = Face value × Dividend % (not issue price × %)
A worked example
Illustrative figures. A company makes an IPO of 40 lakh shares of face value Rs 10 at an issue price of Rs 275.
Total raised = 40,00,000 × Rs 275 = Rs 110 crore
Added to share capital = 40,00,000 × Rs 10 = Rs 4 crore
Share premium = 40,00,000 × Rs 265 = Rs 106 crore
Ninety-six percent of the money the company raised is premium.
Next year the board declares a 40 percent dividend:
Dividend per share = 40% × Rs 10 = Rs 4.00
Yield to an IPO investor = 4 ÷ 275 × 100 = 1.45%
The headline says forty percent. An investor who paid Rs 275 is earning 1.45 percent on it — which is exactly the confusion SEBI's rupee-per-share rule is meant to prevent.
Later, the company plans a buy-back and wants to fund it out of the Rs 106 crore premium account. That is a permitted source. Funding it out of the proceeds of a fresh equity issue made for the purpose would not be, because the buy-back is of the same class of security.
Why NISM asks about it
Chapter 2.4 (Equity Terminology) defines the share premium with the Rs 50 / Rs 10 example; Chapter 2.5 computes dividends on face value; Chapter 7.7 names the share premium account as a permitted source of funds for a buy-back. Chapter 2's sample question — a 20 percent dividend on a Rs 10 share trading at Rs 120 (answer Rs 2) — is a premium trap in disguise: the market price is there to tempt you into the wrong base.
Common exam traps
- Premium is not part of issued or paid-up capital. A Rs 10 share sold at Rs 50 adds Rs 10 to capital and Rs 40 to premium.
- Premium is not profit. It is contributed by shareholders at issue, not earned.
- Dividend percentages apply to face value, never to issue price or market price. 40 percent on a Rs 10 share is Rs 4 whether it was issued at Rs 10 or Rs 275.
- The share premium account can fund a buy-back; the proceeds of an earlier issue of the same class of securities cannot.
- A premium is not a discount in reverse. Issue at a premium is routine; issue at a discount below face value is allowed only in special cases.
- Do not confuse share premium with a conversion premium. An FCCB's conversion price is usually set at a premium to the market price; share premium is measured against face value.
Where this is taught
- Series II-A · Chapter 2: Characteristic of Equity Sharesintroduced here
- Series II-B · Chapter 2: Characteristic of Equitiesintroduced here
Related terms
- BuybackA company purchasing its own shares out of reserves and extinguishing them, reducing share capital and raising earnings per share for the shareholders who remain.
- Face valueThe denomination a company's capital is divided into and carried in its books — fixed, printed on the certificate, and the base on which dividend percentages and stock splits are computed.
- Authorised capitalThe maximum amount of share capital a company is allowed to issue, fixed in its Memorandum of Association — a ceiling on what can be created, not money the company has.
- Issued capitalThe part of a company's authorised capital that has actually been issued to investors — promoters, the public or specified investors — counted at face value, whatever price the shares were sold at.
- Paid-up capitalThe part of the issued capital that shareholders have actually paid for — issued capital less the calls still outstanding on partly paid shares.
- Bonus sharesAdditional shares issued free to existing shareholders in proportion to their holding — no tax at allotment, a nil cost of acquisition, and a fresh holding period from the allotment date.
- Convertible debenturesDebentures that turn into equity shares on terms fixed at issue — the investor draws a coupon until conversion, and the company settles the debt in shares instead of cash.