Question

In addition to the purchase of own shares by a company and to issue fully paid bonus shares, for which of the following purposes security premium account balance could be used?
(A) To write-off preliminary expenses of the company.
(B) To pay premium on the redemption of preference shares or debentures of the company.
(C) To write-off the expenses of, or commission paid, or discount allowed on any securities of the company
(D) To pay the issue price of debentures.
Choose the correct answer from the options given below:

• A. (A), (B) and (C) only
• B. (A), (B) and (D) only
• C. (A), (B), (C) and (D)
• D. (B), (C) and (D) only

Hint:

Section 52 allows securities premium for bonus shares, preliminary expenses, issue expenses or discount, and redemption premium. Paying the issue price of debentures is not on that list.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
Securities premium is the amount a company receives over the face value of its shares. It is a capital reserve, so the law allows it to be used only for the purposes listed in Section 52 of the Companies Act, 2013. It cannot be used freely like a revenue profit.

Step 2: Key Approach:
The permitted uses are: (i) issue of fully paid bonus shares, (ii) writing off preliminary expenses, (iii) writing off expenses, commission or discount on issue of shares or debentures, (iv) premium payable on redemption of preference shares or debentures, and (v) buy-back of own shares. We check each statement against this list.

Step 3: Check statement (A):
Preliminary expenses are the costs of forming the company. Section 52 allows the securities premium balance to be used to write them off. So (A) is TRUE.

Step 4: Check statement (B):
When preference shares or debentures are redeemed at a premium, the extra amount can be met from the securities premium account. So (B) is TRUE.

Step 5: Check statement (C):
Expenses, commission or discount on any securities issued by the company can be written off against the securities premium balance. So (C) is TRUE.

Step 6: Check statement (D):
The issue price of debentures is a normal liability of the company, and it is not one of the purposes named in Section 52. Securities premium cannot be used to pay it. So (D) is FALSE.

Step 7: Match with the options:
Only (A), (B) and (C) are correct. Option 2 and option 4 include (D), and option 3 includes all four, so they are wrong. Option 1 is correct.

Final Answer:
Statements A, B and C are permitted uses of the securities premium account. This is option 1. \[ \boxed{\text{Option 1: (A), (B) and (C) only}} \]