What does the share premium account prohibit a company from doing?

A share premium account is established when a company issues shares at a value exceeding their nominal or par value. This account is part of a company's equity and serves specific purposes under corporate law. The correct understanding is that a company is prohibited from paying dividends directly from the share premium account.

The rationale behind this prohibition is rooted in the fundamental principles of corporate finance which protect the interests of shareholders and creditors. Dividends are typically paid out of a company’s distributable profits, which ensures that payments do not negatively impact the company’s ability to meet its obligations. Since the share premium account represents funds that are considered a surplus over the nominal value and are not earned income, dividends cannot be drawn from it. This regulation helps maintain financial stability and safeguards the interests of all stakeholders.

The other options address different aspects of corporate finance and law. Issuing shares at nominal value does not conflict with the purpose of the share premium account, as a company can choose to issue shares at their nominal value or at a premium. In terms of settling debts, a company must abide by legal restrictions, but it can use funds from the share premium account under certain conditions. Lastly, updating the company charter is a governance matter that does not relate directly to the operations of the share