Hero Ltd, started a new venture of making casual shirts. The directors decided to issue 5,000,00 shares of Rs. 10 each at Rs. 12 each. The following assets were purchased by the company
A building of Rs. 10 lakhs
Furniture of Rs. 7 lakhs
Machinery of Rs. 2 lakhs
The company purchased cloth of Rs. 20 lakhs and paid wages Rs. 5,00,000 to the workers. The Directors also decided to buy 10,000 shares of TATA Ltd. of Rs. 10 each and at the end of the year Tata Ltd. Paid Rs. 10,000 as dividend
Security Premium Reserve can be used by Hero Ltd. for
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Issuing fully Paid Bonus shares
Hero Ltd. collects Rs. 2 a share above the face value of Rs. 10, and this premium is credited to the Securities Premium Reserve. Section 52 of the Companies Act, 2013 allows this reserve to be used only for a few listed purposes, and issuing fully paid bonus shares to the members is one of them.
Option (1) Buying raw material — Incorrect. Raw material is bought out of the general funds of the business; the premium cannot be spent on day-to-day purchases.
Option (2) Buying Fixed assets — Incorrect. Buying fixed assets is not one of the purposes the Act allows for this reserve.
Option (4) Making investment in other companies — Incorrect. Investing in shares of other companies is not a permitted use of the securities premium.
NCERT (2026-27 edition):
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