When a company goes for an IPO, it collects money that is higher than face value of the company. For accounting purposes, this additional money (or capital) is transferred to a separate account known as share premium account. This share premium account has to be considered as part of the total capital i.e. it has to be captured in company’s balance sheet. There are many different ways this premium account can be used. I will list few of them in very common layman language.
- Company pays bonus shares and/or options to many employees or services provided to the company. These bonus shares and options are paid from premium share account;
- Use it to balance out or writing off company’s expenses in issuing IPO;
- Use it to balance out or writing off commission paid for marketing expenses of IPOs;
- Use it to balance out or writing off discounts allowed to any issue of shares or debentures of the company;
- Use the money for share buy back;
- Use the money to fund growth and expansion for the company;
- It cannot be used for dividends.
Number of Equity Shares and Capital Base – A Simple Discussion
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The nse site, giving financial results,a company mentions about Paid-up Equity Share Capital. Ex For axis bank has 36crore shares ,it mentions equity share capital as 36 crore*10 = 360 crore. What does this mean. because the actual capital raised would be the shares offered to public*ipo price. Will not this be the equity base of a company? and for finding EPS why do we consider the entire number of shares rather than only the number issued to public (since the capital raised would be only that much).
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When I form a company, I use my personal capital (i.e invest my own money) into the company and business activities. In the process of forming and registering a new company, according to Companies Act, it needs to be capitalized. Capitalization is the process in which owners have to come with number of shares and its face value.
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