This article is written by Calista Chettiar, a Second-Year BA. LL.B. (Hons.) student from NMIMS, School of Law, Bangalore.

INTRODUCTION:

Section 53 of the 2013 Companies Act regulates the issuance of shares at a discount. When a corporation offers shares at a price lower than their face value, this is referred to as issuing shares at a discount. For instance, the corporation issues a share at 950 rupees instead of the face value of 1000 rupees. The discount, in this case, is Rs. 50. It could seem like the company has lost everything. It’s crucial to understand that an issue of shares over their face value but below their market price is not considered to be an ‘issue of shares at discount.’ When a Share is issued at a discount, the Nominal Value (NV) of the shares is always lower. It is deducted from the ‘Discount on Issuance of Share’ Account, a separate account.

SECTION 53 OF THE COMPANIES ACT, 2013:

1. Except as provided in Section 54, a company may not provide discounted shares.
2. Any share that a company issues at a 1[discount] is invalid.

[(2A) Notwithstanding anything enclosed in sub-section (1) and (2), a business can issue discounted shares to its debt holders when the conversion of loans into shareholdings is part of a statutes special resolution or debt restructuring scheme that conforms with any rules, instructions, or regulatory requirements stipulated by the Reserve Bank of India under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.]

[(3) If a company violates the provisions of this section, the company and each officer who is in violation are subject to fines that could reach five lakh rupees or the amount raised through the sale of discounted shares, whichever is less. In addition, the company is responsible for returning all money received with interest at a rate of 12%. per annum from the date of issue of such shares to the persons to whom such shares have been issued.]

CONDITIONS THAT MUST BE COMPLIED WITH BY THE COMPANY:

There are a number of requirements that the companies must meet:

1. To issue the shares at a price below the face value, the corporation needs authorization from the relevant body. In order to get approval, they need to call a general assembly to discuss and approve the matter.
2. Within 60 days of receiving approval from the relevant authorities, the company must issue the shares. In some cases, the company may be able to extend this time restriction after gaining approval for the permit.
3. The discount rate has a limit. A company is not allowed to discount shares by more than 10%.
4. The shares must belong to the same category as those that are on the market right now. If the corporation has previously issued Equity shares, for instance, it must only issue Equity shares this time.
5. These shares cannot be issued until one year has elapsed since the company’s operations began.
6. After obtaining confirmation from the general meeting, the corporation must also request clearance from the central government.

PROHIBITION OF ISSUES OF SHARES AT DISCOUNT:

In general, it has always been forbidden by the Companies Act to sell assets at prices below their intrinsic worth. It was established in Ooregum Gold Mine Co. of India v. Roper., the issue of discounted shares is patently unconstitutional and the receivers are responsible for the entire value of the shares they received. Note that a discounted share purchase contract is null and void.

It is additionally illegal to issue discounted shares indirectly. The enterprise in Mosley v. Koffyfontein Mines Ltd. granted discounted debentures in conformity with the statute but also extended each holder the choice of converting their debenture into common stock. This was an apparent attempt at selling a stock at a low price, which is illegal.

Each guilty official may be sentenced to imprisonment for a term of not less than 6 months or penalized not less than 1 lakh rupees but not more than 5 lakh rupees if the corporation is found guilty of violating the restrictions outlined in this section.

EXCEPTION OF PROHIBITION OF ISSUES OF SHARES AT DISCOUNT:

It is crucial to keep in mind that the legislation permits the issuance of shares at a discount in the following scenarios:

1. Sweat Equity Shares: Directors and staff often acquire sweat equity shares as a kind of remuneration. As a substitute for monetary compensation, it might be provided free of charge. Sweat equity is a type of remuneration given to executives and workers in exchange for their services, knowledge, and/or the provision of intellectual property rights or other value additions to the firm. Employee Stock Option Plans (ESOPs) are a common method of encouraging staff members to enhance performance due to their own part in the corporation, but sweat equity shares serve a unique objective and are significantly different from ESOPs.
2. Issue of Shares to Creditors: The business can issue such securities to its lenders upon the conversion of its debt into share capital in order to be compliant with any parliamentary special resolution (such as the ones offered by the Insolvency and Bankruptcy Code 2016) or perhaps a debt restructuring strategy in conformance with any regulations, edicts, or norms under the Reserve Bank of India Act 1934 or the Banking (Regulation) Act 1949.
3. Right to Issue at Discount: A business may require additional funding for a number of reasons, such as expansion or preservation. In accordance with Section 62 of the 2013 Companies Act, extra share capital may be issued. The business may opt to provide shares to its current shareholders in a rights issue rather than distributing shares to the general public.
4. Initial Public Offering: The share capital of a hitherto unlisted firm that chooses to go public is valued at its initial public offering (IPO). To its workers or to the general public, the issuing corporation may offer shares at a maximum discount of 10%. Once a firm has gone public, it may conduct a follow-on public offering (FPO) to sell additional shares to the general population or to existing shareholders (IPO). Within legal boundaries, a rebate may be offered to retail investors in this case.
5. Offers for Sale: An OFS takes place when listed businesses (as sellers) transparently sell the shares to reduce promoter interests or holdings while abiding by SEBI’s minimum public shareholding regulations. The conditions of the discount must be stated in the OFS announcement notice by the sellers of shares in an OFS issuance. Oftentimes, either the bid price or the final allotment price receives the drop.

Often At a premium, shares are issued. On occasion, we make the decision to offer shares at a discount. When a private limited company is unable to pay its debts and offer its share to its creditors, discounted rates may be made available. Public and private limited corporations were not allowed to issue shares at a discount under the Company Act of 2013. Directors risk fines and prison time for their actions. The penalties clauses underwent recent revisions. A fine of Rs. 5 lakhs or a sum equivalent to the amount raised by the issue of shares at a discount is imposed under Section 53. Moreover, Public and Private Limited Companies shall be obligated to return the funds with interest accruing at a rate of 12% annually from the date the shares were issued. Thus, never consider the decreased pricing. The alternatives for issuing shares are countless.

REFERENCES:

https://blog.ipleaders.in/can-shares-issued-discount/

https://www.nbaoffice.com/never-issue-shares-at-discount-of-private-limited-company/

https://www.toppr.com/guides/principles-and-practices-of-accounting/issue-forfeiture-reissue-of-shares/issue-of-shares-at-discount/

https://ibclaw.in/section-53-of-the-companies-act-2013-prohibition-on-issue-of-shares-at-discount/