CA Intermediate · Corporate and Other Laws · Share Capital and Debentures
Kaveri Foods Ltd issued 10,000 equity shares of Rs 10 each at a premium of Rs 5 per share. The board proposes to use the securities premium account to write off the preliminary expenses of the company and to pay up unissued shares as fully paid bonus shares. Which is the correct legal position?
Both applications are permitted. The securities premium account may be used to issue fully paid bonus shares and to write off preliminary expenses, along with share issue expenses, redemption premium and buy-back. So the proposal by Kaveri Foods is legally valid.
- ABoth applications are permitted under the ActCorrect
- BOnly writing off preliminary expenses is permitted; bonus shares cannot be paid from securities premium
- COnly bonus shares are permitted; writing off preliminary expenses is prohibited
- DNeither is permitted, as securities premium can be used only for buy-back
Explanation
Section 52 allows securities premium to be applied for issuing fully paid bonus shares, writing off preliminary expenses, writing off share or debenture issue expenses and commission, providing for premium on redemption of preference shares or debentures, and for buy-back. Both proposed uses are in this list, so the distractors that prohibit either one are wrong.
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