What Is A Premium Issue ?

RadhikaSona · #1 19th October 2007, 06:30 PM

Generally, most shares have a face value (i.e. the value as in a balance sheet) of Rs.10 though not always offered to the public at this price. Companies can offer a share with a face value of Rs.10 to the public at a higher price.

The difference between the offer price and the face value is called the premium. As per the SEBI guidelines, new companies can offer shares to the public at a premium provided :

1.The promoter company has a 3 years consistent record of profitable working.

2.The promoter takes up at least 50 per cent of the shares in the issue.

3.All parties applying to the issue should be offered the same instrument at the same terms, especially regarding the premium.

4.The propectus should provide justification for the propose premium. On the other hand, exisiting companies can make a premium issue without the above restrictions.

A company’s aim is to raise money and simultaneously serve the equity capital. As far as accounting is concerned, premium is credited to reserves and surplus and it does not increase the equity. Therefore, a company which raises Rs.100 crores by way of shares at say Rs.90 premium per share increases its equity by only Rs.10 crores, which is easier to service with an investment of Rs.100 crores.

Thus the companies seek to make premium issues. As well shall see later, a premium issue can increase the book value without decreasing the EPS. In a buoyant stock market when good shares trade at very high prices, companies realize that it’s easy to command a high premium.

balraj167 · #2 3rd April 2008, 07:42 PM

that's very good can focus more on book building

share bull · #3 4th April 2008, 03:24 PM

A Company can freely its Issue (at a premium) if it fulfils the following eligibility criteria:

i. it has a net tangible assets of atleast Rs. 3 crores in each of the preceeding 3 full years of which not more than 50% is held in monetary assets.

ii. the Company has a track record of distributable profits (as per Sec 205 of Companies Act, 1956) for atleast 3 out of the immediately precedig 5 years.

iii. the Company has had a pre-Issue networth of not less than Rs. 1 crore in each of the 3 preceding full years.

iv. the Company has not changed its name in the last 1 year; and if it has then atleast 50% of the revenue of the said full year has come from the business conveyed by the new name.

v. the proposed Issue size does not exceed 5 times the pre-Issue networth.

If a Company fails in any one or more of the above conditions, it shall have to compulsorily go for a book building issue where:

a. it gets its projects appraised by a financial institution with atleast 15% participation by financial institutions/banks and the appraising institution puts in atleast 10% of the above 15%

OR

b. the issue is made compulsorily through a book building route where QIBs (Qualified Institutional Buyers) subscribe to atleast 60% of the issue.

If a Company fulfills all the 5 criteria above, then it can make a fixed price issue or a book building issue where QIBs can subscribe up to 50% of the issue size. If the subscription is less than 50%, but the issue is oversubscribed from other i.e., retail & HNIs, the issue is till through.