As you’ve noticed, our equity includes a line item called as ‘Share premium’. What is this premium?
A share premium comes into the equation once we decide to pay contributions into the share capital. A mere payment into the capital is of course an option but as it is, there are often times when it’s not wise to put all the money into the capital due to reasons we’ve mentioned before.
When investing into a company, you most definitely want to do it in a considerable amount and there are times when other reserves aren’t an option. Thus increasing the share capital alongside with the share premium is the way to go. How you’d come by increasing those line items is another matter however. The first step on the road is to decide on the total amount you’re willing to invest. Once that’s decided, it’s another matter identifying how many new shares you want to issue with their nominal price and how much ‘more’ you want to pay for those new shares. For an instance say that you want to pay into your company 10,000 CU and issue 100 new shares with a nominal price of 2 CU. In such example the share capital would increase by 200 (100 shares timed by 2 CU) and the share premium by 9,800 CU (10,000 CU less 200 CU that was recognized within the share capital).
A share premium is something that’s paid in addition to the nominal price for the share and thus the name ‘premium’. The amount of premium is entirely up to the shareholders to determine each time a new contribution is made into the entity’s capital.