Generally, 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 also offer a share with a face value of Rs.10 to the public at a higher price.and this difference between the offer price and the face value is called 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
.
Thus the companies seek to make premium issues. 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.