What is Issue of Shares at Premium?

S7-SA7-0311

Grade Level:

Class 12

AI/ML, Physics, Biotechnology, FinTech, EVs, Space Technology, Climate Science, Blockchain, Medicine, Engineering, Law, Economics

Definition

What is it?

When a company sells its shares for a price higher than their 'face value' (original value), it's called 'Issue of Shares at Premium'. The extra amount collected above the face value is the 'share premium'.

Simple Example

Quick Example

Imagine a new chai stall opens in your colony. They sell a cup of chai for Rs. 10 (its original cost). But because their chai is super famous and tasty, people are willing to pay Rs. 12 for the same cup. Here, Rs. 10 is the face value, and the extra Rs. 2 is the 'premium' they are collecting because of their brand value.

Worked Example

Step-by-Step

Let's say a company, 'TechWiz Pvt. Ltd.', decides to issue 10,000 shares. The face value of each share is Rs. 10.

1. The company decides to issue these shares at a premium of Rs. 5 per share.
2. This means the 'issue price' per share will be Face Value + Premium = Rs. 10 + Rs. 5 = Rs. 15.
3. If an investor buys one share, they pay Rs. 15.
4. The total money collected from issuing 10,000 shares will be 10,000 shares * Rs. 15/share = Rs. 1,50,000.
5. Out of this, the 'Share Capital' (face value part) will be 10,000 shares * Rs. 10/share = Rs. 1,00,000.
6. The 'Securities Premium' (premium part) will be 10,000 shares * Rs. 5/share = Rs. 50,000.

Answer: TechWiz Pvt. Ltd. collects Rs. 1,50,000 in total, with Rs. 1,00,000 as share capital and Rs. 50,000 as securities premium.

Why It Matters

Understanding share premium is crucial for anyone interested in FinTech or Economics, as it helps analyze how companies raise funds and value themselves. Knowing this can open doors to careers in investment banking, financial analysis, or even starting your own successful EV or Biotech startup by understanding company finances.

Common Mistakes

MISTAKE: Confusing face value with issue price. | CORRECTION: Face value is the original, fixed value of the share, while issue price is the total amount paid by the investor, which includes face value plus premium.

MISTAKE: Adding the premium to the share capital account. | CORRECTION: The premium amount is always kept in a separate account called 'Securities Premium Reserve' and is not part of the company's main share capital.

MISTAKE: Thinking all companies issue shares at a premium. | CORRECTION: Only financially strong and well-performing companies can generally issue shares at a premium because investors trust their future growth and are willing to pay more.

Practice Questions

Try It Yourself

QUESTION: A company issues 5,000 shares with a face value of Rs. 20 each at a premium of Rs. 8 per share. What is the total issue price per share? | ANSWER: Rs. 28

QUESTION: If 'SmartEdu Ltd.' issues 20,000 shares at a face value of Rs. 50 with a premium of Rs. 15. Calculate the total amount received as 'Securities Premium'. | ANSWER: Rs. 3,00,000 (20,000 shares * Rs. 15 premium)

QUESTION: 'GreenEnergy Co.' issues 15,000 shares. The total amount collected is Rs. 4,50,000. If the face value per share is Rs. 20, what is the premium per share? | ANSWER: Rs. 10 per share (Total collected per share = Rs. 4,50,000 / 15,000 = Rs. 30. Premium = Rs. 30 - Rs. 20 = Rs. 10)

MCQ

Quick Quiz

When shares are issued at a price higher than their face value, the extra amount received is called:

Share Capital

Debenture Amount

Securities Premium

Dividend

The Correct Answer Is:

Securities Premium is the extra amount collected over the face value of shares. Share Capital is the face value part, Debenture Amount is for loans, and Dividend is profit distributed to shareholders.

Real World Connection

In the Real World

When big Indian companies like Reliance Jio, Tata Motors (for their EV ventures), or even successful startups like Zomato or Paytm, decide to raise money from the public, they often issue shares at a premium. This shows their strong brand and market position, attracting investors who are willing to pay more for a piece of these growing businesses.

Key Vocabulary

Key Terms

FACE VALUE: The original, nominal value of a share. | ISSUE PRICE: The total price at which a share is sold to the public. | PREMIUM: The extra amount collected above the face value. | SECURITIES PREMIUM RESERVE: The account where the premium amount is kept. | SHARE CAPITAL: The part of the total collected amount representing the face value of shares.

What's Next

What to Learn Next

Great job understanding share premium! Next, you should explore 'Issue of Shares at Par' and 'Issue of Shares at Discount'. This will help you compare different ways companies issue shares and understand the full picture of how businesses raise money.