In today's article, we'll dive deeper into what the premium emission is, how it's calculated, when and why it's used. In addition, we will analyze their role in a company's balance sheet.

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What is the premium emission?

The premium issue is the difference between the face value of a security and the price at which it is issued. According to the National Securities Market Commission (CNMV), in an issue of shares or shares, this premium is a premium paid by new partners or shareholders, with the objective of increasing the company's reserves and avoiding the dilution of existing investors with the entry of new investors.

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The emission premium has several key functions. First, it serves to increase society's reserves. The additional funds obtained through the issuance premium strengthen the company's financial position, providing a financial cushion that can be used for new investments, the reduction of existing debts or the improvement of the company's overall liquidity.

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Second, the premium issue avoids the dilution of existing partners or shareholders. Issuing new shares without a premium reduces the proportional participation of current shareholders. The issuance premium compensates current investors for capital gains generated before the entry of new investors, thus keeping their participation proportional and protecting their investment.

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When is the emission premium used?

The premium issue is mainly used in situations of capital increase, where new shares or shares are issued. In these cases, if the new securities are sold for a price higher than the nominal value, the difference is considered an issue premium. This mechanism is crucial in financial markets where the company seeks to raise additional funds without negatively affecting existing shareholders. By issuing new shares or shares at a premium, the company can obtain additional capital at a price higher than their nominal value, which translates into a direct increase in its capital reserves.

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Practical example:

1. With emission premium:

The company has a share capital of €5,000 divided into 5,000 shares with a par value of €1 per share.

After a while, the company wants to increase its capital by €10,000 and issues 1,000 new shares at a price of €10 per share.

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In this case, the calculation would be as follows:

1. Number of new shares: 1,000
2. Nominal value per share: 1€
3. Issue price per share: 10€
4. Premium issue per share: 9€ (10€ - 1€)
5. Total premium issue: 9,000€ (1,000 shares x 9€)

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In this scenario, the company obtains €10,000 in total for the issuance of new shares, of which €1,000 corresponds to the increase in share capital (1,000 shares for €1) and €9,000 to the premium issue.

• Total shares after the expansion: 6,000 shares (initial 5,000 + 1,000 new)
• Initial shareholder participation:

1. Before expansion: 5,000/5,000 = 100%
2. After enlargement: 5,000/6,000 = 83.33%

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To understand the role played by the premium emission in the dilution of the first shareholders, let's compare the opposite case:

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2. No premium emission:

Following the previous example, the company is proposing a capital increase of €10,000. On this occasion, since there is no premium issue, the price of the new shares issued is the same as their nominal value, 1€, so it issues 10,000€ new shares. In this case, the share capital increases from €5,000 (5,000 shares) to €15,000 (15,000 shares).

• Total shares after the expansion: 15,000 shares (initial 5,000 + 10,000 new)
• Initial shareholder participation:

1. Before expansion: 5,000/5,000 = 100%
2. After enlargement: 5,000/15,000 = 33.33%

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The key here is that the premium issue does not affect the percentage of direct participation, but additional funds strengthen the company, thereby protecting the value of the shares of initial investors by avoiding an issue at nominal value that could devalue the shares.

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It is important to remember that The nominal value of a share is usually 1€, although it can be any value. This value must be set taking into account that it is the minimum price at which a company can sell its shares and also reflects the limit of liability of company members in cases of insolvency and impossibility of paying debts.

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Impact of the emission premium on the Balance Sheet

In the balance sheet, the issuance premium appears as a reserve of non-distributable capital. This means that issuance premium funds cannot be treated as benefits or used for general purposes, such as paying dividends to shareholders, but are restricted to certain specific uses. These uses include paying expenses related to the issuance of shares, such as subscription costs, and the issuance of fully paid shares to existing shareholders.

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The issuance premium, being a non-distributable reserve, strengthens the company's capital structure, providing a solid financial base that can be used to sustain future growth and expansion.

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Accounting accounts related to the premium issue

Transactions related to the premium issue are recorded in specific accounts in a company's accounting. One of the main accounts used is account 110, which refers to the Emission Premium. This account records the amount of the issuance premium earned during the issuance of new shares. The accounting entries related to the premium issue are essential for maintaining accurate accounting and correctly reflecting the company's financial structure.

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It is important to note that secondary transactions between investors do not affect the issuance premium account. This account is only updated when there is a direct sale of shares by the company, such as in the case of a capital increase or an initial public offering (IPO).

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Practical example:

When new premium shares are issued, the following entries are made:

1. First of all, It is charged to the treasury or bank account the total amount received. This reflects the increase in the company's liquid assets.
2. Secondly, The share capital account is charged at nominal value of the new actions. This indicates the increase in the company's share capital due to the issuance of new shares.
3. Finally, It is charged to account 110, Emission Premium, the amount of the premium. This accounting entry reflects the increase in the company's capital reserves, strengthening its financial position.

Following the previous example, where 1,000 new shares are issued at a price of 10€ with a premium of 9€, the accounting entries would be as follows:

Can a company be incorporated with an issuance premium?

Although it is more common to talk about the premium issue in the context of capital increases, it is also possible to set up a company with an issue premium. Partners can make an initial disbursement that is divided between share capital and issue premium, thus obtaining several advantages, including:

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The issuance premium, as we have already mentioned, provides immediate liquidity to the company. The additional funds raised through the issuance premium are available right from the start, which is crucial for new companies that need capital to establish themselves and grow.

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In addition, a high emission premium reflects a positive projection of the company's value and its growth prospects. This allows investors to have an idea of the exponential value of the company since its inception, which can be attractive for initial investment.

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Another important consideration is that part of the funds allocated to the issuance premium can prevent the company from being disbanded in the event of losses. If the company is constituted with only share capital and faces negative results, Net Worth could be lower than the share capital, leading to the need to dissolve the company. However, with an issuance premium, Net Worth would be higher and could compensate for losses, avoiding this situation.

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It is important to remember that the greater the share capital, the greater the responsibility of the partners. By using an issuance premium, share capital can be maintained at a manageable level while strengthening the company's solvency with additional funds.

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Practical example:

Suppose that three partners decide to set up a company, but each one contributes a different amount of money and contributes differently to the project. The premium emission allows them to balance their contributions so that everyone has a proportional share in the company.

Initial contributions from partners:

• Member A: 25,000€ (provides less capital but is the one who provides the idea and is dedicated to the development of the product)
• Member B: €25,000 (provides less capital but is also dedicated to product development)
• Member C: 75,000€ (provides more capital but has less dedication to the project)

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To balance their shares, a share capital of €30,000 is established, divided equally among the partners. This means that each partner will receive an equal share in the share capital, regardless of their total contribution.

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Distribution of share capital and the issuance premium:

1. Social capital:
   • Total share capital: 30,000€
   • Share of each partner in the share capital: 30,000€/3 = 10,000€
2. Emission premium:
   • Total contribution from member A: 25,000€
     • Share in the share capital: 10,000€
     • Issue premium: 25,000€ - 10,000€ = 15,000€
   • Total contribution from member B: 25,000€
     • Share in the share capital: 10,000€
     • Issue premium: 25,000€ - 10,000€ = 15,000€
   • Total contribution from member C: 75,000€
     • Share in the share capital: 10,000€
     • Issue premium: 75,000€ - 10,000€ = 65,000€

Summary of the structure:

• Partner A:
  • Share capital: 10,000€
  • Issue premium: 15.000€
  • Total contribution: 25,000€
• Partner B:
  • Share capital: 10,000€
  • Issue premium: 15.000€
  • Total contribution: 25,000€
• Partner C:
  • Share capital: 10,000€
  • Issue premium: €65,000
  • Total contribution: 75,000€

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The use of the issuance premium makes it possible to balance the different contributions of the partners, ensuring that each one has an equitable participation in the company's share capital. This is particularly beneficial in situations where partners have different levels of contribution, whether in terms of financial capital or dedication to the project. For example, one partner may provide a greater amount of capital while another partner contributes to the idea and development of the product. By establishing an issuance premium, the value of the different contributions is adequately reflected, thus strengthening the company's financial base since its creation and ensuring a fair and proportional participation structure.

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Is the emission premium applicable to Enisa?

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Yes, Enisa considers the emission premium when granting participatory loans. One of Enisa's fundamental requirements is that the company has carried out a recent capital increase, which often includes an issuance premium. The loan limit that can be requested from Enisa is determined by the company's own funds. A strong issuance premium increases equity, thus improving financing capacity and the perception of financial stability before Enisa. As we have seen, this premium must be recognized in the company's net worth, under a specific account within its own funds.

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