📌 Bringing Investment as Share Premium: A Smart Strategy for Raising Funds?

Yes, raising investment through Share Premium is a great strategy to bring funds into a company without increasing the number of shares significantly or affecting ownership dilution. However, it comes with some legal and financial considerations.

Let’s explore when it’s beneficial, how it works, advantages, disadvantages, and regulatory compliance.

🔹 What is Share Premium?

When a company issues shares above their face value, the extra amount received is called Share Premium.

Formula: Share Premium=Issue Price−Face Value\text{Share Premium} = \text{Issue Price} – \text{Face Value}

Example:

• Face Value of Share = ₹10
• Issued Price = ₹1,000
• Share Premium per Share = ₹990
• If 1,000 shares are issued, the company receives:
  • ₹10,000 as Paid-Up Capital (1,000 × ₹10)
  • ₹9,90,000 as Share Premium (1,000 × ₹990)

💡 Result: The company receives ₹10,00,000 in total investment while keeping equity dilution minimal!

🔹 When is Share Premium a Good Idea?

✅ 1. If the Company Has Strong Growth & Market Valuation

• If investors believe in the company’s future potential, they may pay a premium for shares.
• Example: Startups with strong business models raise funds at higher valuations.

✅ 2. If You Want to Raise Funds Without Increasing Share Count Too Much

• Instead of issuing many low-value shares, the company can issue fewer high-premium shares.
• Reduces dilution while still raising capital.

✅ 3. If You Want to Protect Founders’ Ownership & Voting Rights

• Since share premium does not increase face value, founders maintain better control.
• Useful for private limited companies who want to raise money without giving up management power.

✅ 4. If You Want to Maintain a Strong Financial Image

• A company with a high share premium account is seen as financially strong by investors and banks.
• It improves the company’s net worth and borrowing capacity.

✅ 5. If You Want to Use Premium for Future Business Expansion

• Share premium can be used for specific business purposes like:
  • Product development
  • Brand marketing
  • Business expansion

🔹 When NOT to Use Share Premium?

🚫 1. If Your Business Has No Strong Valuation Justification

• If investors don’t see growth potential, they won’t agree to pay a high premium.
• In this case, raising funds through direct equity might be better.

🚫 2. If You Need Immediate Working Capital

• Share premium funds cannot be used for regular business expenses (like salaries, rent, etc.).
• Better alternative: Take a short-term business loan or raise preference shares.

🚫 3. If It Will Lead to Tax & Compliance Issues

• Under Section 56(2)(viib) of the Income Tax Act, any share premium received above the fair market value (FMV) is taxed as income for the company.
• Avoid this issue by:
  ✔ Getting a valuation certificate from a CA before issuing shares.
  ✔ Making sure the issued share price is justifiable.

🚫 4. If You Want to Give Equal Opportunities to Small Investors

• Share premium increases the cost per share, making it harder for small investors to participate.

🔹 Advantages of Raising Investment as Share Premium

🔹 Disadvantages & Risks of Share Premium

🔹 Step-by-Step Process to Raise Investment via Share Premium

Step 1: Determine Fair Market Value (FMV) of Shares

✔ Get a valuation report from a CA or SEBI-registered valuer.
✔ Ensure the share premium is justifiable.

Step 2: Hold a Board Meeting & Get Shareholder Approval

✔ Board of Directors must pass a resolution approving share premium issuance.
✔ If needed, call an Extraordinary General Meeting (EGM).

Step 3: File Necessary ROC Forms

✔ MGT-14 (For Special Resolution) – If required
✔ PAS-3 (Return of Allotment) – Within 30 days of issuing shares

Step 4: Issue Share Certificates to Investors

✔ Update the Register of Members with new shareholding details.
✔ Provide Share Certificates within 2 months of allotment.

Step 5: Ensure Proper Utilization of Share Premium Funds

✔ Cannot be used for daily expenses.
✔ Can be used for business expansion, R&D, marketing, and debt repayment.

🔹 Key Compliance & Legal Considerations

1️⃣ Income Tax Act (Section 56(2)(viib)) – Angel Tax

• If a Private Limited Company issues shares at a premium above FMV, the extra amount is taxed.
• To avoid tax issues, always get a valuation certificate from a CA before issuing shares.

2️⃣ Companies Act, 2013 – Section 52 (Share Premium Utilization Rules)

• Share Premium CAN be used for:
  ✔ Issuing bonus shares
  ✔ Writing off preliminary expenses
  ✔ Paying off company debt
  ✔ Business expansion
• Share Premium CANNOT be used for:
  ❌ Paying salaries
  ❌ Funding regular operational costs

3️⃣ SEBI Guidelines (For Listed Companies)

• Public companies must justify share pricing through proper market-based valuation.

📌 Final Verdict: Is Raising Investment as Share Premium a Good Idea?

✔ YES, it’s a good option if:

• You have a strong valuation & investor confidence.
• You want to raise funds without significant dilution.
• You are in growth mode and need capital for expansion.

❌ NO, avoid it if:

• The company needs quick working capital.
• You cannot justify the premium through proper valuation.
• You are a new startup without a strong financial track record.

✅ Final Tip: Always consult a CA or financial expert before issuing shares at a premium to ensure tax & legal compliance. 🚀

Would you like help with calculating share premium or preparing ROC filings? 😊