November 10, 2022

Prohibition on issue of shares at discount

Section 2(84) of the Companies Act 2013 defines share as “-a share in the share capital of a company including stocks.”

Why a Company issues shares?

A Company issues shares out of its share capital as authorized to do so, depending on the type of company it is and as per its incorporation documents i.e Memorandum of Association and Articles of Association.

It does so for the simple reason that a Company needs to grow in its business and for this, it must be willing to raise money. In order to do so, it will issue a prospectus to invite those willing to take an interest in its business and they will be known as potential investors. After the prospectus is issued, applications are received and then the shares are allotted.

This remains as one of the most efficient ways of raising capital by increasing ownership stakes thereby creating numerous interests in the business of the company which will help it thrive.

According to the 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 Companies Act 2013 (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] shall be void.

Punishment for violation of Section 53

(3) Where a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

It is interesting to note that unlike the new Companies Act, the erstwhile Companies Act of 1956 provided in its section 79 for the power of a Company to issue shares at discounts after prior approval of the Company Law Board was obtained.

Often Shares are issued at Premium. Sometime the situation arises where we decide to issue shares at discount. Discounted prices may be offered when company is not able to pay its debts and offering it share to its creditors.

Company Act 2013 strictly prohibited the companies to issue shares at discounted price. It invites penalty and imprisonment for directors.

Recently the changes were made in the penalty provisions. Section 53 levies penalty equal to the amount raised by the issue of shares at a discount or Rs. 5 lakh, whichever is lower.

Company shall also be liable to refund the money received with interest at 12% per annum from the date of issue of the shares.

So never think of discounted price. You have so many options to issue of shares.

Rights issue at discount

A company may have to raise additional capital for its growth or preservation or whatever the reason might be. It is allowed for such further issue of share capital as u/s. 62 of the Companies Act 2013

In the rights issue, the company may choose to issue shares to its existing shareholders instead of resorting to issue of shares to the public. Such shares are issued at a discount given in the market price. It also helps to increase the stake of the existing shareholders.

“The basic idea is to raise fresh capital. A rights issue is not a common practise that a corporate organization resorts to. Ideally, such an issue occurs when a company needs funds for corporate expansion or a large takeover. At the same time, however, companies also use rights issue to prevent themselves from being conked out.

Since a rights issue results in higher equity base for the organization, it also provides it with better leveraging opportunities. The company becomes more comfortable when it comes to raising debt in the future as its debt-to-equity ratio reduces.”

Such a spectacle was seen in the beginning of 2019 when Vodafone Idea resorted to a rights issue at a deep discount in order to combat the competition of Airtel’s rights issue and also against Reliance Jio.

This rights issue of Rs.25,000 crores was seen to be the largest ever by any company in the country, being priced at Rs.12.50 a share.

This issue was oversubscribed nearly by 1.08 times

Conclusion

The many ways of issuing shares at discount have thus been listed. It is important to make sure that there is no violation of S.53 of the Act which has been brought about by a recent amendment as it can be seen that it provides for strict punishment for the contravention of its provisions.

BIBLIOGRAPHY

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