PROHIBITION ON ISSUE OF SHARE AT DISCOUNT

Share is the interest of the member in the company, it represents ownership in the company. When an individual buys the share of any company, they become one of its owners known as shareholders choose who run a company and are involved in making key decisions.

As per Companies Act 2013 section 2 (84) defines Share as, “Shares means share in share capital of the company including stock”. Shareholders get Dividend as return on their investments. Types of Shares Company issues:

  • EQUITY SHARE CAPITAL
  • PREFERENCE SHARE CAPITAL

It may further divide into different kinds of share based on their features and characteristics company can issue those shares on three main values

  1. ISSUE AT PAR:            Shares are to be called as issued at Par when the issue price of  

                                             share is equal to their nominal value of shares according to the  

                                             terms and conditions of the issue.

  • ISSUE AT PREMIUM: When the shares are issued at an amount higher than the face value  

                                       or nominal value of the shares. The difference between the Par   

                                       value and Higher amount at which shares are issued is called    

                                       premium. There is no provision regarding the maximum amount  

                                       as premium it is at the discretion of the company.  

  • ISSUE AT DISCOUNT: Black’s Law dictionary enumerates the word Discount as;
  • A reduction from the full amount or value of something especially price.
  • An advanced deduction of interest when a person lends money on a note, bill of exchange, or other commercial papers resulting its present value.

Black’s Law dictionary states “Discount Share” means A shares issued for less than par value.

It is to be noted that for the purpose of the shares at discount the meaning should be taken into account with relation to the nominal value of share only. As per the prescribe provisions of the Companies Act 2013 no company can issue shares below the nominal value of the shares except sweat equity shares even if the market value of shares is below the Nominal value of shares.

One should keep in mind that, if a share of the company issued at a price lower than the market price but not below the nominal value of shares, such an issue is not an issue at a discount.  “At a discount” means at a price less than the Nominal Value. However, due to use of word ‘Discounted Price’ there is an oddity but the same is being proposed to be removed and the word Discount is to be substituted for the word discounted price, vide Companies (Amendment) Bill 2016.

Section 53 of the Companies Act 2013:

Prohibition on issue of shares at discount.

(1) Except as provided in section 54, a company shall not issue shares at a discount.

(2) Any share issued by a company at a discount[1] shall be void.

[2][(2A) Notwithstanding anything contained in sub-sections (1) and (2), a company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the Reserve Bank of India under the Reserve Bank of India Act, 1934 (2 of 1934) or the Banking (Regulation) Act, 1949 (10 of 1949).]

[3][(3) Where any company fails to comply with the provisions of this section, such company and every officer who is in default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at a discount of five lakh rupees, whichever is less, and the company shall also be liable to refund all monies received with interest at the rate of twelve per cent. per annum from the date of issue of such shares to the persons to whom such shares have been issued.]

Provision of this section is applicable only to the shares of the company that is Equity and Preference shares, Debenture and other securities are not covered under this section, However the, Debenture and other securities convertible into shares then same cannot be issued on discount.

[Mosely v. Koffyfontein Mines Ltd., (1904) 2 Ch 109 (CA), Famatina Development Corpn, Ltd. v. Bury, (1910) AC 439 (HL); Trustees Corporation (India) Ltd. v. CIT AIR 1930 PC 151.]

If a company issued convertible debentures or other securities on discount which will be converted into the shares of the same nominal amount straight away, that will be equivalent to issuing the shares at the rate of discount at which the debentures had been originally issued and, consequently, the issue of shares in exchange will be illegal.

Indian judiciary has undergone a development, while allowing the petition of the company under [i]section 79 for issue of non-cumulative convertible preference shares which was to be converted into equity shares at discount of 16.67% after 18 months, the company law Board in re: Jersey India Ltd.1997 88 CompCas 864 CLB, expanded the horizons of section stating that, “The section has not contemplated a conversion at a discount as such nuances in corporate capital structuring perhaps were not in contemplation earlier. However, the objective behind the legal provision being what it is and since the power to allow more time is vested in the Company Law Board, the sanction relating to conversion at discount is not beyond the scope of the section.

Difference between section 53 (1) and 53 (2)

Section 53 (1) is a restrictive provision that except as provided in section 54 a company shall not issue shares at discount. It means the company can’t discount the face value of shares. Whereas in case of sub-section (2) the term used is discounted price. It shall meet the two conditions one is there shall be a price fixed and the same is discounted.

Determining the price:

As prescribed by section 62 and rules as may be applicable every company who is willing to issue shares and other securities under the preferential allotment or private placement shall get its shares valued by a registered valuer. The price of offered shares shall be fixed and same shall not be less than the valuation done by the registered valuer. If the shares are issued at price less than the price determined as per the valuation, the provision of this sub-section shall be attracted, such issue of shares shall be void.

In case of Right issue there is no requirement to comply with the provisions of the section 62, the Board of Directors are at liberty to fix the price, though BoD shall exercise such power in the best interest of the Company.

Offences and Penalties:

 Section 53(3) prescribes that if the company contravenes the provision of this section then will be penalized;

Company: The company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Officer: Every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both. (The offenses under this section are compoundable under section 441 of the companies act 2013)


[1] Subs. by Act 1 of 2018, s. 12, for “discounted price” (w.e.f. 9-2-2018).

[2] Ins. by s. 12, ibid. (w.e.f. 9-2-2018).

[3] Subs. by Act 22 of 2019, s. 9, for sub-section (3) (w.e.f. 2-11-2018).


[i]https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00008_201318_1517807327856&sectionId=1270&sectionno=79&orderno=82

https://indiankanoon.org/doc/859733/

Study material ICSI Company Law (Executive Programme)

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