Generally, most shares hàvé à face value [i.e. thé value às în à balance
sheets] ôf Rs.10 though not always offered tô thé public àt thîs price.
Companies càn offer à share wîth à face value ôf Rs.10 tô thé public àt
a higher price.
The difference between thé offer price
and thé face value îs called the premium.
As per thé SEBI guidelines, new companies càn offer shares tô thé public
at à premium provided :
1.The promoter Comp. hàs à 3 years consistent record ôf profitable
working.
2.The promoter takes up àt least 50 per cent ôf shares în thé issue.
3.All parties applying tô thé issue should bé offered thé same
instrument àt thé same terms, especially regarding thé premium.
4.The propectus should provide justification fôr propose premium. On
the ôthér hand, exisiting companies càn make à premium issue
without thé above restrictions.
A
company’s aim îs tô raise money & simultaneously
serve thé equity capital. As far às accounting îs concerned,
premium îs credited to reserves & surplus & ît doesn't
increase thé equity. Therefore, à Comp. whîch raises Rs.100 crores ßy
way ôf shares àt say Rs.90 premium per share increases
its equity ßy only Rs.10 crores, whîch îs easier tô service wîth àn
investment ôf Rs.100 crores.
Thus thé companies seek tô make premium issues. As well
shall see later, à premium issue càn increase thé book
value without decreasing thé EPS. In à buoyant
stock
market
when good shares trade àt very high prices, companies realize
that it’s easy tô command à
high premium.
