Prohibition on Issue of Shares at Discount

A share represents the amount of shareholding a person has in the company. Shares are the divided capital of the company.[i] This is a form of ownership in the company and is offered by the company to raise capital for itself. The person who buys these shares when they are released by the company is called a shareholder and has a right to profits of the company equal to the shares they hold. It is a sort of investment and ownership of the company. This paper will look at shares and the prohibition on issues of shares at discount.

A company can only issue shares depending on its authorization on the basis of the company’s memorandum of association and articles of association, accompanies by the rules set down in the Companies Act, 2013. Shares can be understood by dividing how they work:

  1. Authorized share capital – this is the upper limit of share capital that the company is allowed to raise, including all kinds of shares. This has to be submitted to the Registrar of Companies in the memorandum of association of the company. Shares cannot exceed the amount submitted in the memorandum of association. Authorized share capital can be increased by amendment to the memorandum of association.[ii]
  2. Issued share capital – this is the capital by the company which has been issued, and this can be less or equal to the authorized share capital.
  3. Subscribed share capital – this is the portion of the issued capital which has been subscribed to by the shareholders.
  4. Called-up capital – these are the shares which have been completely paid for out of the subscribed shares. The opposition to this is “uncalled capital” which are shares not yet called up and can be called up later.
  5. Paid-up Share Capital – these are the shares which have been called for and paid for fully. The opposition to this is “unpaid share capital” which are shares not been fully paid for since the company does not require the money.

As discussed previously, the capital of the company is divided into a number of indivisible units which are called shares, and have a fixed value; they are also known as “owner’s funds”. A share is not any sum of money but an interesting measure by a sum of money and made up of a ‘bundle of rights’ conferred on its holder by the Articles of the company.[iii] Shares are the smallest unit of capital, and stocks are the aggregate of fully paid-up member shares merged into one bundle of multiple shares.

Under section 43 of the Companies Act, 2013, there are primarily 2 different types of shares.

Equity shares

These are shares which are not preference share capital.[iv] The shareholders who have equity shares can carry both voting rights and differential rights.[v] There is no fixed rate of dividend that these shareholders earn every year, and it depends on a year-to-year basis. If the company does not do well, then they do not have any rights to the dividend.

Preference shares

These are shares which carry rights with respect to matters of payment of dividends, repayment in case of winding up and other such rights.

They primarily have 2 rights[vi]

  1. Payment of dividend: their dividend is fixed, either on the amount or rate of the face value of the share issued
  2. Repayment in case the company is winding up: In this case, the principal amount is paid first to shareholders holding preference shares, and then the rest of the money goes to equity shareholders.  

There are 4 types of preferential shares

  • Participating and non-participating

Participating shares are those entitled to a fixed amount/rate of dividend along with the right to participate in surplus profit with equity shareholders after equity shareholders have been paid a certain dividend.

Non-participating shares they do not have the right to the extra surplus profit or surplus assets.

  • Cumulative and non-cumulative

Cumulative shares confer a right on the person that as long as they don’t get dividends, such dividends will get cumulated and they get all such cumulated dividends together the year dividend is announced.

Non-cumulative shares wherein if a shareholder does not get a dividend one year, it is not carried on to the next year.

  • Redeemable and irredeemable

Redeemable shares are the shares which are required to be repaid after a specific period of time.

Irredeemable shares are not allowed in India.

  • Convertible and non-convertible

Convertible shares are those preference shares which can be converted to equity shares after a certain point.

Non-convertible shares are those shares which cannot be converted to equity shares.

Issues of shares are when there is a private allotment of shares. Section 56 of the Companies Act, 2013 lays down the procedure to be undertaken while issuing shares in this manner. There can be two different ways of issue of shares

  1. Issue of shares for consideration other than cash: This can be for the purchase of fixed assets, payment to creditors, and for promoters for their services during incorporation of the company.
  2. Issue of shares for cash

The issue of shares can be at their

  1. face value,
  2. at a premium amount, or
  3. at a discount amount.

Section 53 of the Companies Act, 2013 prohibits the sale of shares at a discounted price and states any such sale of shares will be void.[vii] If a company does partake in this, then the company is liable to pay an amount which is equal to the amount raised in this way, or 5 lakh rupees, whichever is less.[viii] However, section 54 of the companies act, 2013 provides for exceptions.

  • Sweat Equity Shares

These are shares which are issued by the company to its Employees or directors. These are issued at a discount or for some other consideration other than cash. It is an acknowledgement of the contribution and efforts of the employee and is supposed to be a reward, like a bonus.

  • Issue of Shares to creditors

Shares at a discount may be offered to creditors when the debt owed by the company is converted into shares. This can be done while pursuing any statutory resolution plan under the Insolvency and Bankruptcy Code, 2016. Or, under a debt restructuring scheme in accordance with the Banking (Regulation) Act, 1949 and the Reserve Bank of India, 1934.

  • Rights issue at a discount

A company is allowed to raise additional capital for preservation or growth.[ix] It generally occurs when a company has to fund a corporate expansion or large takeover. It also tends to provide good leverage opportunities. These shares are issued to existing shareholders instead of the public at large and are given at a discount in market price.

  • Initial public offering

This is the first issue price of the share capital of an unlisted company after which they become a listed company. An issuer company can allot these shares to its retail individual investors or its employees at a discount. The discount cannot be more than 6%.

  • Offer for sale

This is when shares are sold by a company to dilute promoter holdings or stakes in the company to comply with the minimum public shareholding in SEBI Rules. Discounts can be given to retail investors if the SEBI rules allow them to.

Thus, overall, section 53 of the Companies Act, 2013 does not allow for discounts to be given at share prices and the same is generally prohibited in all situations. However, if companies manage to meet any of the five criteria for giving discounts, they will not be in contravention of section 53 of the Companies Act, 2013.

[i] Glossary, ‘Shares,’ (The Economic Times), <> Accessed 17th October 2022;

Companies Act, 2013, section 2(84).

[ii] Satish Chandra Sanwalka v. Tinplate Dealers Association, 2001 107 CompCas 98 CLB.

[iii] CIT v. Standard Vaccum Oil Co., AIR 1966 SC 1393, (1996) 1 CompLJ 187 SC.

[iv] Companies Act, 2013, Section 43, Explanation (i);

Juvansinhji Balusinhji & Ors. v. Bhalbhadrasinhji Indrasinhji, (1962) 0 GLR 715.

[v] Companies Act, 2013, Section 43(a).

[vi] Companies Act, 2013, Section 43, Explanation (ii).

[vii] Companies Act, 2013, Section 53.

[viii] Companies Act, 2013, Section 53(3).

[ix] Companies Act, 2013, Section 62.

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