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2.  The object of Section 78 of the 1956 Act was to lay down specifically
how the securities premium accounts collected on the issue of shares
should be utilized. The expression “premium” is not defined. It may be
that if, over and above the cash payment on the shares, some further
advantage measurable in terms of money is conferred on
the company the value of such advantage will have to be regarded, as
in the nature of a securities premium. A company is not bound to issue
shares at a premium. A company proposed to issue further shares
under section 81 of the 1956 Act and offer them at a securities premium.
A preference shareholder filed a suit for a declaration that
the company was a public company. The issue raised was placed
before the management of the company because of an interim order
passed in the suit. The equity shareholder with majority shareholding
opposed the proposed issue of shares during pendency of suit. The
court found that the valuation of shares was not shown to be artificial or
exaggerated. The court said that the equity shareholder could subscribe
to such share to maintain its holding. The issue of shares at a premium
was not illegal.
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 Any share premium collected by a company on issue of shares is
required to be retained in a individual account. This amount cannot be
utilized for any purpose, other than the ones specified in Sub-section(2)
of Section 78 of the 1956 Act. If the amount lying in the securities
premium account is used for any other purposes, it would tantamount
to reduction in share capital, attracting the provisions of Section 66 of
the 1956 Act. It may be noted that section 52 of the 2013 Act calls for
transfer of premium collected on shares to ‘securities’ premium
account. While both equity and preference shares may be issued at
premium, generally only convertible debentures are issued at a
premium. Section 52 of the 2013 Act is not attracted where the
convertible debentures are issued at premium and are convertible at
par. In such cases, the premium collected is either transferred to profit
and loss account or amortized over the term of debentures. However, in
cases where the debentures are issued at par, but are convertible at a
premium, such premium is transferred to securities premium account,
and the section id attracted.

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The securities premium account may be applied for the following
purposes:-
 The paying up of fully paid bonus shares to be issued by the company
to its members;
 The writing-off of preliminary expenses of the business registration;
 The writing-off of the expenses of, or commission paid or discount
allowed on, any issue of shares or debentures of the company;
 The providing of a premium payable by the company on redemption of
redeemable shares or redemption of shares or debentures of
the company. However, under the 2013 Act this is subject to the
provisions of Section 55(2) of the 2013 Act, which allows use of
securities premium account to provide for premium on redemption of
preference shares in certain cases only – for redemption of preference
shares issued prior to commencement of the 2013 Act.
 Purchase of its own Securities or other required securities in terms of
section 77A of the 1956 Act;

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 Share premium is a new class of capital of a company which is
quasi-share capital but not distributable as income any more than
any other capital asset. On a winding up the surplus monies in
the share premium account will be returned to the shareholders
as capital and so as long as the company is going concern. The
same monies can never be returned to the shareholders except
through the median of a reduction notice or, in other words,
except under exactly the same requirements as those under
which any other capital asset can reach the shareholder’s hands.
Another effect of the section is that distribution of share ( now
Securities) premium amount as dividend is not permitted. But
premium received on the issue of shares, under the 1913 Act,
were profits and so distributed as dividends.

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The court has a discretion whether or not to conform a reduction of a share
(now securities) account and would normally to do so where;
 The shareholders are treated equally;
 The reduction proposals are properly explained;
 The creditors are safeguarded;
 The reduction is for a discernible purpose.
On the facts , the first two tests were satisfied. There were no danger to
creditors since the use of the reserve created in the consolidated account
by the reduction in the share(Securities) premium account to ‘write-off’
the goodwill in the consolidated accounts would not affect the creditors
of the underlying companies since they were the creditors of a
particular company and not of the group. The undertakings given to the
court protected the creditors in the parent company whose securities
premium account was being reduced. The fourth test was also satisfied
since the purpose of the reduction was to create a reserve against which
the goodwill arising in the future on the consolidation of the accounts
could properly be set-off.

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 The company proposed to write-off accumulated losses by
utilizing the share premium account and by reducing the face
value of the shares. The need and purpose of reduction was duly
explained and discussed at an extraordinary general meeting of
the company at which a special resolution was unanimously
passed. The company had no creditors. The unsecured creditors
had given their written consent. Nothing was shown to be there
either against public interest or against law. The court allowed
the proposed reduction. The share premium account is treated as
paid up share capital for a limited purpose. But, it cannot be
treated as a ordered fund. A company cannot write-off its losses
against share (Securities) premium account unless there is a
legal permission to that effect. A company can be allowed to
write-off, or adjust a loss against share(now securities) premium
account if there is no diminution of the share capital account.

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 The articles of the business registration permitted the
securities premium account and Capital Redemption
Reserve fund to be applied for paying up the unissued
shares to members as fully paid bonus shares. The
proposed reduction of capital neither involved
diminution of liability in respect of unpaid capital, or
payment to any shareholder of paid up capital. The
court permitted the company to dispense with the
procedural requirements of section 101(2) and
approved the reduction.

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 Application of the amount in
the premium account for any
purpose other than those
indicated in the section has
been held to be not
allowable. The company was
attempting to wipe out
losses incurred in investment
in securities of
other companies by taking-
off the money from the
premium account and
reducing it accordingly. The
Court did not permit it.

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 Bonus shares were issued by capitalization of the share (Securities) premium
account. The issue was made without the authority of an ordinary resolution
of the company. Further, the shares in respect of which bonus shares were not
fully paid-up. This was held to be a mistake. The issue was void. It could not
be regularized by the fact of informal agreement between the shareholders.
Nor it could be said that the allottees of such shares were dealing with the
company in good faith from outside so as to come within the protective scope
of section 35A of the English Companies Act,1985.Talking to the essential
nature of the bonus issue , the Court of Appeal said that profits and other
available reserves are capitalized and applied to paying up unissued shares
or debentures which were then issued to the existing shareholders in
proportion to their entitlement to dividends. The defendants in this case, in
failing to act with the authority of an ordinary resolution and issuing bonus
to shareholders whose shares (Securities) were not paid up, had the effect that
the directors had no power to capitalize any sum standing to the credit of the
share( Securities) premium account or to appreciate it to members.

14. Cancellation of Securities Premium
Account
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 In a New Zealand case the company sought conformation by the information of the
special resolution to issue from time to time its securities premium account to its
ordinary shareholders. The directors were to transfer from the revenue reserves to a
special capital replacement fund an amount equal to the amount to be distributed.
That fund was not to be available for payment of dividend nor to be distributed to
shareholders, but could be applied in paying up unissued shares as fully paid
bonus. No objections had been obtained from the creditors. The sundry trade
creditors had been regularly paid. The Court said that the issued and distribution of
the securities premium account is equal to an actual return of the paid-up capital
and can only be made in precisely same way as a reduction of capital. The motives
of the business registration enabling it to distribute dividends in part tax free in the
hands of shareholders did not affect confirmation by the Court. Where there is a
evidence of the company’s intention to pay its tax and its creditors, other than the
monthly trade creditors, Consent to the reduction and the company is solvent, these
are called “Special circumstances” in which the court may dispense with the
provisions of the Act. The Court may dispense with an inquiry as to creditors on
condition that a fund is held for their payment.

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 The business registration is carried out under section
78 of the 1956 Act for reduction of share (Securities)
premium account for the purpose of meeting deferred
tax liability. Shareholders had approved the
reduction by a resolution. In keeping the order of the
High Court a public notice was published for inviting
objection was received. Reduction of the account was
accordingly confirmed.

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 A Company issued and distributed the
convertible debentures. The conversion was to be
at a stated rate of premiums. The market value of
the shares was below the premium amount. The
company passed a resolution for cancellation of
the premium amount which was to be collected
with the third and the final call. The objecting
creditors interest was secured and safe by making
deposit in the court. The resolution for reduction
of securities was confirmed to be carried on.