Securities Premium: What Section 52 Lets You Do With The Money

Your company raises ₹5 crore. ₹1 lakh lands in share capital; ₹4.99 crore lands in securities premium. Your finance head now asks the question every founder eventually asks: Can we actually spend it? The answer turns on a distinction the Companies Act, 2013 draws sharply but nowhere explains, between the reserve on your balance sheet and the rupees in your bank account, with different sections governing each.

What is Securities Premium

When a company issues shares at a price above their face value, the excess is considered a securities premium. For example, if a share with a face value of ₹10 is issued at ₹1,000, the ₹10 goes to share capital, and the remaining ₹990 is credited to the securities premium account. While both components form part of permanent shareholder funds, they are subject to vastly different regulatory treatments. 

The Companies Act, 2013, does not restrict the maximum premium a company can charge, nor does it require ROC approval for such a premium. It is generally treated as a tax-free capital receipt, but the law strictly restricts how the resulting reserve can be utilised. This statutory control is crucial because share capital and securities premium behave differently on the balance sheet. 

Share capital is directly reflected in your authorised and paid-up capital figures, determines your ROC filing fees, and limits the number of shares you can issue. In contrast, securities premium carries none of these constraints. Consequently, a company with just ₹1 lakh of authorised and paid-up capital can easily hold ₹50 crore in shareholder funds. This is precisely why founders raising capital through a priced round rarely need to increase authorised capital to match the total investment amount.

Here is how the two sit side by side:

Is there a cap on the premium?

No, and the reason is worth stating precisely, because the valuation requirement is routinely misread as a price band. Section 53 of the Companies Act, 2013 prohibits issuing shares at a discount, which closes the bottom end. Nothing in the Act closes the top end. What the valuation provisions require is that the price be determined based on a registered valuer’s report, a basis-and-documentation obligation rather than a numerical ceiling.

Read the words. Section 62(1)(c) permits a further issue to any person, if authorised by a special resolution, where the price of such shares is determined by the valuation report of a registered valuer, subject to compliance with the applicable provisions of Chapter III and any other prescribed conditions, wording substituted by the Companies (Amendment) Act, 2020, with effect from 22 January 2021. Rule 13(2)(g) of the Companies (Share Capital and Debentures) Rules, 2014 repeats it for a preferential offer. Neither provision says “not less than”. Neither says “not more than”.

FEMA restricts the exit, not the entry. 

Rule 21 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 operates as a two-way mechanism. For share issuances to non-residents or transfers from residents to non-residents, the price must not fall below the fair value determined on an arm’s-length basis using an internationally accepted pricing methodology. On the other hand, when a non-resident transfers equity instruments to a resident, the transaction price cannot exceed that very same fair value, creating a firm price ceiling. 

This means an overseas investor can pay any premium upon entering, but is limited to fair value when selling to an Indian resident. If your cap table involves a resident buying out a foreign shareholder, you should account for this restriction at the term sheet stage rather than waiting until exit.

The issue-side cap no longer exists: For twelve years, an economic ceiling was effectively imposed by Section 56(2)(viib) of the Income-tax Act, 1961, which taxed any consideration exceeding fair market value in closely held companies. This provision was sunset by the Finance Act, 2024, starting from Assessment Year 2025-26, and the Income-tax Act, 2025 chose not to re-enact it.

One practical trap between the Companies Act and FEMA. 

The Companies Act requires the report from a registered valuer under Section 247; FEMA Rule 21 accepts certification by a Chartered Accountant, a SEBI-registered Merchant Banker or a practising Cost Accountant. Those sets are not identical, and a round with a foreign investor has to satisfy both. Separately, under the second proviso to Rule 13(1), a listed company issuing on a preferential basis does not need a registered valuer’s report at all; the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, instead set a floor-price formula. A share valuation report is therefore a floor-setting and documentation requirement, not a price control.

Section 52 In Plain English

Section 52 of the Companies Act, 2013 does two things and only two things. Sub-section (1) creates the account and ring-fences it. Sub-section (2) lists the narrow set of purposes for which the balance in that account may be applied. Sub-section (3) narrows the list further for a prescribed class of companies. Nothing in Section 52 speaks to how the money is spent — a distinction that causes more confusion in practice than any other feature of the section.

The ring-fence in Section 52(1) works through a deeming fiction. Once the premium is credited to the securities premium account, the Act’s reduction-of-capital machinery applies to that account “as if the securities premium account were the paid-up share capital of the company”. In practical terms, you cannot pay it out to shareholders, you cannot use it to dress up your distributable profits, and you cannot shrink it, except by one of the routes Section 52 itself permits, or by a formal reduction of capital sanctioned by the Tribunal under Section 66.

That fiction is the whole architecture. Investor money paid as a premium is treated as capital contributed to the enterprise, not as a windfall available for recycling. The rule descends directly from Section 78 of the Companies Act, 1956, which the 2013 Act reproduced with an added sub-section (3). The policy has been stable in Indian law for roughly seven decades: creditors and future shareholders should be able to read the balance sheet and know that the premium column represents capital that stays in.

The Five Permitted Uses

Section 52(2) opens with a non-obstante clause, meaning that the clause applies “despite” or “in spite of” any other conflicting rules or laws, and then lists five applications of the securities premium account. Each is capital in nature. Each either converts the reserve into share capital or absorbs a cost that is itself a capital cost of raising or returning capital. Nothing on the list allows the reserve to be turned into distributable profit, and the National Company Law Tribunal has now confirmed that the list is exhaustive rather than illustrative.

The five uses, with the companion sections that carry them:

Beyond the general rules, two critical restrictions further narrow these options for certain entities. First, under Section 52(3), a prescribed class of companies that must follow accounting standards under Section 133 can only utilise the securities premium account for bonus equity shares, equity issue expenses, and buy-backs, effectively removing preliminary expenses and redemption premiums from their options. Second, Section 55(2)(d)(i) separately requires this same class to fund redemption premiums on preference shares out of profits, keeping the securities premium option available only for preference shares issued before the commencement of the 2013 Act. For all other entities, Section 55(2)(d)(ii) leaves the broader, traditional position completely intact.

What the NCLT held in Modern Hi-Rise

In Modern Hi-Rise Pvt. Ltd., C.P. No. 238/KB/2024, decided on 9 September 2025, the NCLT Kolkata Bench dismissed a petition that sought, among other things, to reclassify a securities premium balance into retained earnings so that a preference-share redemption premium could be funded. The company’s own case was that the premium funds sat idle beyond its foreseeable operational needs. The Tribunal applied the doctrine of ejusdem generis to Section 52(2) and (3), held that the enumerated purposes form a closed class of capital adjustments, and held that securities premium, a capital receipt, cannot be recharacterised as retained earnings, which are revenue in nature.

The Tribunal also rejected the application under the proviso to Section 66(3), which bars the Tribunal from sanctioning a capital reduction unless the proposed accounting treatment conforms to the Section 133 standards and the company’s auditor has certified that it does. The Registrar of Companies, West Bengal, had flagged that the auditor’s certificate did not address the Section 52 problem and suggested a reference to the ICAI. The practical lesson is blunt: an accounting entry that moves securities premium into retained earnings is not a technicality that a tidy note can cure, and the professional signing off on it carries exposure.

Accounting And Disclosure

Under both the Accounting Standards and Ind AS frameworks, the securities premium is recognised at the point of allotment, not at the point of receipt. Money received before allotment sits as share application money pending allotment,  a separate line item, and, in a private placement, a separate bank account. Once the shares are allotted, the receipt is split between the nominal value and the excess, and the excess is credited to the securities premium. The entry is mechanical; the disclosure requirements around it are where companies slip.

Where it appears in the accounts

Schedule III regulates the presentation of securities premiums under the Companies Act, 2013. For companies applying Accounting Standards, it is classified as a sub-item under “Reserves and Surplus” within Division I. For entities operating under Ind AS, it is placed under “Other Equity” in Division II and included in the Statement of Changes in Equity. 

Following the MCA notification G.S.R. 1022(E) dated 11 October 2018, the term “Reserve” was eliminated from the line item in both Divisions, meaning the accurate contemporary designation is simply “Securities Premium”. This update also introduced a mandate for the Notes to outline the explicit purpose of each equity reserve. While this latter compliance requirement is routinely overlooked, a straightforward, one-line note stating the Section 52 restrictions is sufficient to satisfy it.

Can You Spend The Money?

Yes, and this is the point at which most explanations of Section 52 go wrong. No provision in the Companies Act, 2013 says “money received as securities premium may be used in the ordinary course of business”, because no such provision is needed. Section 52 restricts what the securities premium account may be debited for. It says nothing about the bank account. Once the premium is received and the shares are allotted, the rupees are simply the company’s money, indistinguishable from any other rupees on the asset side.

Understand the balance sheet mechanics, and the answer becomes obvious. Securities premium sits on the equity side; the cash sits on the asset side. When you buy machinery, pay salaries or fund working capital, you are moving one asset into another asset or into an expense. That entry never touches the securities premium account. It is only “applied” 

Where the authority actually comes from

To cite the source of authority for deploying these funds, look to the combination of provisions that empower all standard corporate expenditures, rather than Section 52.

• Section 4(1)(c): The objects clause of the memorandum states the objects for which the company is incorporated and matters considered necessary in furtherance of those objects. Expenditure must fall within it.
• Section 179(1): The Board is entitled to exercise all such powers, and do all such acts and things, as the company is authorised to exercise and do. Deploying the company’s own funds within its objects is an ordinary Board power.

This constitutes the entire legal framework. Premium funds can be utilised to finance capital expenditures, staffing, marketing, working capital, and corporate acquisitions on par with revenue receipts or term loans—subject, however, to the end-use conditions specified in the following section.

What would actually breach Section 52?

An entry breaches Section 52 if it reduces the reserve itself. Prohibited actions include:

• Writing off accumulated operating losses.
• Transferring the premium to retained earnings or general reserves.
• Paying dividends since Section 123(1) restricts dividends to actual profits.
• Writing down impaired assets or bad debts.

⚠️ The Real End-Use Gates

If your money came in through a private placement, which is how almost every Indian priced round is structured, then the restrictions on when and how you may use the funds are in Section 42, not Section 52. These are timing and purpose gates, and unlike Section 52, they carry monetary penalties that bite the company, its promoters and its directors personally. Getting the sequence wrong is the single most common and most expensive error in Indian fundraising.

Sequential Order of Things

Compliance failures carry substantial financial risks. Under Section 42(9), any delay in filing Form PAS-3 triggers a daily penalty of ₹1,000 on the company, its promoters, and directors, up to a maximum of ₹25 lakh. Furthermore, Section 42(10) stipulates that accepting capital in violation of the rules can lead to a penalty of up to ₹2 crore or the total amount raised, whichever is lower, along with a mandate to refund all monies with interest within 30 days of the penalty order. 

Moving or sweeping funds from the escrow account on the very day they arrive, before the formal allotment and the submission of PAS-3, creates a major legal vulnerability rather than a mere clerical oversight. Our detailed guide on the allotment of shares outlines the exact procedural sequence.

Position of Share Premium from the public issue.

Companies that raised capital through a prospectus face a different gate. Section 13(8) bars a company that has raised money from the public through a prospectus. Still, it holds any unutilised amount, and it cannot change the objects for which it raised that money, unless a special resolution is passed, and the prescribed details are published in the newspapers. Dissenting shareholders are given an exit in accordance with SEBI regulations. Section 27 deals with variation in the terms of a contract or the objects stated in the prospectus. Neither restriction has anything to do with Section 52, but both restrict end use in ways Section 52 does not.

If the subscriber is a non-resident

Where a non-resident subscribes, a second, parallel track opens. The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, set a pricing floor and require reporting in Form FC-GPR within 30 days of allotment. Completing the Companies Act track does not discharge the FEMA track, and vice versa. Late filing attracts a Late Submission Fee. If your round has an overseas investor, build the FC-GPR reporting into the same timeline as PAS-3 rather than treating it as a follow-up item.

Why It Is Not A Free Reserve

Securities premium is not a free reserve; it affects areas well beyond dividend policy. While Section 2(43) defines free reserves as those available for dividends per the latest audited balance sheet, Section 52(1) bars the distribution of securities premium. Together, they confirm that any threshold expressed in terms of free reserves excludes securities premium unless explicitly stated otherwise.

The Companies (Amendment) Act, 2017, settled this distinction. Effective 9 February 2018, vide S.O. 630(E), it amended the borrowing threshold in Section 180(1)(c) to read “paid-up share capital, free reserves and securities premium”—a separate addition that would be redundant if it were already a free reserve. The same drafting pattern appears in Section 186(2), which sets the loan and investment ceiling at sixty per cent of paid-up share capital, free reserves and securities premium, or one hundred per cent of free reserves and securities premium, whichever is more.

Where securities premium count

It is vital to consider the implications on net worth. Section 2(57) explicitly factors the securities premium account into the net worth calculation. Consequently, an entity with ₹1 lakh of paid-up capital and ₹50 crore of securities premium cannot be treated as a mere ₹1 lakh company for any net-worth-based evaluation, such as tender eligibility, CSR applicability under Section 135, or lender covenants. If your shareholding has changed following a priced round, you must reassess those thresholds; several of them will now be triggered.

Tax After The 2025 Act

While the angel tax is gone, scrutiny of share premium remains. Section 68 of the 1961 Act, carried into Section 102 of the Income-tax Act, 2025, empowers Assessing Officers to treat unexplained credits as income. For share subscriptions in closely held companies, the business must establish the investor’s identity, creditworthiness, the genuineness of the transaction, and, under the Finance Act, 2012, the “source of the source”. The General Anti-Avoidance Rule also applies if an arrangement lacks commercial substance.

For genuine companies, this demands strict documentation discipline rather than tax exposure. Safekeeping valuation reports, corporate resolutions, PAS-4 and PAS-5 records, bank trails, and investor source documents during the funding round are essential, as Section 102 assessments turn on evidence that is much easier to assemble immediately than years later.

Conclusion

Section 52 regulates the premium reserve, not the bank balance. The NCLT has confirmed that this account is ring-fenced like paid-up share capital and restricted strictly to the exhaustive capital purposes listed in Section 52(2) and (3). Once shares are allotted and Form PAS-3 is filed, the actual cash becomes ordinary company funds deployable under the Board’s powers within the memorandum’s objects clause.

Founders typically struggle with sequencing rather than spending: drawing on subscription funds before allotment, missing the PAS-3 timeline, failing to match PAS-4 disclosures, or improperly moving premium into retained earnings. Before executing a priced round, bonus issue, or preference redemption, our experts can map out the exact sequence and filings. Start with our share allotment service.

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