The securities premium amount may be utilized by a company for:

Question

Accepted Answer

The correct option is 3:
Writing off the expenses/ discount on issue of debentures is explicitly authorized for the utilization of the Securities Premium Account under Section 52(2)(c) of the Companies Act, 2013. The premium received on the issue of shares is a capital receipt and must be treated as a capital reserve, which is why its application is heavily restricted by law. This specific statutory use permits a company to set off the substantial capital expenditure incurred during the fundraising process—such as brokerage, underwriting commission, or the initial discount on debentures—against this capital reserve. This is considered sound financial practice as it matches capital-related expenses with a corresponding capital reserve, rather than charging them against the company's distributable profits.

The incorrect option is 1:
Writing off any loss on sale of fixed asset is not a valid use of the Securities Premium Account. A loss arising from the sale of a fixed asset, even though it involves a capital item, is generally a business loss that should be charged to the Statement of Profit and Loss (i.e., against revenue profits). The Companies Act strictly enumerates the allowed uses for the Securities Premium, and applying it to cover a routine loss on the disposal of a fixed asset is not among the authorized purposes. To maintain capital integrity, the premium must only be used for the few specified capital-related items.

The incorrect option is 2:
Writing off any loss of revenue nature is fundamentally incorrect. The Securities Premium is a non-distributable, protected capital reserve, and revenue losses, such as operating deficits or general administrative expenses, must be borne by the company’s operating income and the accumulated Profit and Loss Account surplus. Allowing the use of this capital reserve for routine revenue expenses would be a violation of the statutory provisions and would lead to an overstatement of the company’s distributable profits, compromising the protection of shareholder capital.

The incorrect option is 4:
The option "All options are right" is incorrect because, as detailed above, the utilization of the Securities Premium Account is severely restricted by the Companies Act. Since neither writing off a loss on the sale of a fixed asset (Option 1) nor writing off a revenue loss (Option 2) is a permissible use of this capital reserve, it cannot be said that all given options are correct. Only the use specified in Option 3 is legally allowed.