Historical Context
The concept of share premium dates back to the early days of corporate finance when companies began issuing shares to the public to raise capital. As the demand for shares increased, companies often found that investors were willing to pay more than the nominal value of the shares. This surplus amount is what is known as the share premium.
Definition and Explanation
A share premium refers to the amount payable for shares in a company that is issued in excess of their nominal (par) value. For instance, if a company’s share has a nominal value of $10 but is issued at $15, the share premium is $5.
Types of Share Premium
- Initial Public Offering (IPO) Premium: When a company first goes public, the price at which its shares are offered may include a premium above the nominal value.
- Follow-on Public Offering (FPO) Premium: During subsequent offerings, shares may be issued at a premium reflecting the company’s growth and profitability since the IPO.
Key Events and Usage
- Crediting to Share Premium Account: Share premiums received by a company must be credited to a share premium account.
- Restrictions on Usage: This account cannot be used for paying dividends to shareholders. However, it can be used to:
- Issue fully paid bonus shares (scrip issues).
- Write off preliminary expenses or underwriting commissions.
- Provide for the premium payable on redemption of debentures or preference shares.
Detailed Explanations
Mathematical Formulas
The calculation of share premium can be represented by the formula:
$$ \text{Share Premium} = \text{Issue Price} - \text{Nominal Value} $$
Charts and Diagrams
Here’s a simple representation using Mermaid diagrams:
graph LR
A[Nominal Value]
B[Issue Price]
C[Share Premium]
A -- "Subtract from" --> B
B -- "Equals" --> C
Importance and Applicability
Importance
- Capital Raising: It allows companies to raise more capital without increasing the nominal value of shares.
- Financial Health Indicator: The presence of a significant share premium can indicate investor confidence in the company’s prospects.
Applicability
- Accounting Practices: Ensures transparency in how companies report their financials.
- Corporate Governance: Provides a mechanism for companies to manage their capital structure effectively.
Examples
- Example 1: A company with a nominal share value of $1 issues new shares at $3. The share premium per share is $2.
- Example 2: During a rights issue, shares with a nominal value of $5 are issued at $8, resulting in a share premium of $3 per share.
Considerations
- Market Conditions: Share premium amounts are often influenced by market demand and the perceived value of the company.
- Regulatory Frameworks: Different jurisdictions have specific regulations governing the use of share premium accounts.
Related Terms with Definitions
- Nominal Value: The face value of a share as stated in the corporate charter.
- Paid-in Capital: Total amount of capital contributed by shareholders, including both nominal value and share premium.
- Scrip Issue: An issue of additional shares to shareholders, usually at no cost, instead of cash dividends.
Comparisons
- Share Premium vs. Discount: While share premium represents the amount paid above nominal value, a discount refers to shares issued below nominal value.
- Share Premium vs. Retained Earnings: Share premium is part of contributed capital while retained earnings are accumulated profits not distributed as dividends.
Interesting Facts
- Some companies use share premium accounts creatively for corporate actions like mergers and acquisitions.
- Share premium accounts enhance a company’s equity base without the immediate need for asset-backed contributions.
Inspirational Stories
- Amazon IPO: During its IPO in 1997, Amazon’s shares were issued at a price significantly higher than the nominal value, leading to a substantial share premium. This indicated strong investor confidence in the company’s future, which has proved to be well-founded.
Famous Quotes
- “The premium you pay on shares today is the trust investors place in the future of the company.” - Unknown
Proverbs and Clichés
- “A premium price for a premium product.”
Expressions
- “Priced to perfection”: Often used when a stock is sold at a high premium due to positive market perception.
- “Premium stock”: Refers to shares that trade above their nominal value.
Jargon and Slang
- [“Blue-chip stock”](https://financedictionarypro.com/definitions/b/blue-chip-stock/ ““Blue-chip stock””): Shares of a highly reputable company that might sell at a premium.
- [“Going public”](https://financedictionarypro.com/definitions/g/going-public/ ““Going public””): The process of a company offering its shares to the public for the first time, often at a premium.
FAQs
Q: Can share premium be used to pay dividends?
A: No, share premium cannot be used to pay dividends.
Q: How does share premium affect a company's financial statements?
A: Share premium is recorded in a separate equity account and can be used for specific purposes like issuing bonus shares.
Q: Why might investors be willing to pay a premium for shares?
A: Investors may pay a premium due to the company’s strong growth prospects, brand value, or market positioning.
References
- “Corporate Finance: Principles and Practice” by Denzil Watson and Antony Head.
- “Financial Accounting: An Introduction” by Pauline Weetman.
- Legal frameworks from various countries’ company law acts.
Summary
Share premium represents the additional amount paid over the nominal value of shares issued by a company. It is an important part of corporate finance that helps in capital raising without altering nominal values. Governed by strict regulations, it offers limited but strategic uses and reflects investor confidence. Understanding share premium is crucial for stakeholders to gauge a company’s financial health and investment appeal.
