Imagine a company decides to raise capital by issuing shares. But what if the price at which these shares are issued exceeds their face value? That's where the share premium enters the picture. There is currently an ongoing IPO by Ghorahi Cement Industry Limited, with a premium price set at Rs. 435. This has caused some confusion among individuals regarding the concept of share premium. Let's delve into the details to gain a better understanding.

Simply, the share premium is the extra money that the company receives for its shares, beyond their face value. Similarly, Ghorahi Cement offers an IPO where the face value of each share is Rs. 100, while the premium price per share stands at Rs. 335. This additional capital is carefully accounted for in a dedicated reserve account called the share premium account. However, company is bound by certain restrictions on how it can utilize the share premium funds.

Understanding Share Premium Account:

Assume that ABC Company issued 1,000 shares of stock to the public with a par value of Rs. 100 per share. However, instead of the face value, the company decided to issue an Initial Public Offering (IPO) at a premium price of Rs. 150 per share.

Consequently, the shareholders paid Rs. 150 for each share, resulting in a total equity capital of Rs. 150,000. Within this amount, Rs. 100,000 represents the share capital, while the remaining Rs. 50,000 is classified as share premium. Both the share capital and the share premium are recorded under the shareholder's equity section in the balance sheet.

Now that we have a better understanding of share premium and its accounting treatment, let's delve into the specific practices followed in Nepal regarding the issuance of IPOs at a premium price.

Provision of Premium IPO Issuance in Nepal

Have you ever wondered which types of companies have the privilege to issue IPOs at a premium? And what criteria must these companies fulfill to seize this opportunity?

According to Section 29 of the Company Act 2006, a company must meet specific conditions in order to obtain prior approval from the Office for issuing shares at a premium. By fulfilling these conditions, a company becomes eligible to issue shares at a higher price than their face value.

1. The company has been making profits and distributing dividends for three consecutive years.
2. The company’s net worth exceeds its total liabilities.
3. The company’s general meeting has decided to issue shares at a premium

Let's explore the detailed provisions related to the issuance of shares at a premium as outlined in the Securities Registration and Issue Regulation, 2073. This regulation provides specific guidelines and requirements that companies must adhere to when considering the issuance of shares at a premium price. By examining these provisions, we can gain a comprehensive understanding of the regulatory framework surrounding premium share issuance.

Now you may be curious about how companies put their excess funds from the premium account to good use. According to the company act, these surplus funds can be utilized in various ways that benefit the company and its stakeholders. Let's explore some of the exciting possibilities for deploying these funds:

1. Paying up un-issued share capital to be issued to the shareholders as fully paid bonus shares.
2. Providing for the premium payable on redemption of any redeemable preference shares.
3. Writing off the preliminary expenses made by the company.
4. Bearing or reimbursing the expenses of, or the commission paid or discount allowed on, any issue of shares of the company.

In this way, the funds maintained in a share premium account are categorized as non-distributable reserves. This classification implies that the funds cannot be considered as profit available for general purposes, such as distributing dividends to shareholders. Instead, the use of share premium funds is strictly limited to specific transactions. These include covering expenses associated with share issuances (e.g., underwriting costs), allocating new shares as fully paid bonus shares to members, and offsetting equity-related expenses through write-offs.

Determination of Premium Value

Within the Securities Registration and Issue Regulation of 2073, Section 25(A) encompasses a clause concerning the calculation of Initial Public Offering (IPO) premiums.

1. When establishing the premium for securities during an organization's initial public offering, the pricing is determined by considering various elements. These elements include the capitalized earnings of the past three years, the present value of future cash flows (discounted cash flows), and the utilization of at least one other valuation method aligned with international practices. By calculating the price based on these factors, an average is obtained to determine the final premium
2. Additionally, the premium should be maintained at the lower of the two values: the average price established and twice the net worth per share based on the organization's last audited financial statement.

In summary, the share premium account offers significant advantages for companies and shareholders. It provides a safer option to raise additional funds without diluting the number of shares, ensuring the preservation of ownership and control. Additionally, it helps reduce the cost of capital by eliminating the need for additional administrative expenses typically associated with alternative fundraising methods. However, it's important to acknowledge the limitations of the share premium account, as the funds can only be utilized for specific purposes outlined in the bylaws, limiting their flexibility. Therefore, a comprehensive understanding of these advantages and limitations is crucial for companies and investors considering premium IPOs to make well-informed decisions that align with their financial objectives.