Section 53 Of Companies Act 2013: Issue Of Shares At Discount & Its Prohibition

What is Issue of Shares at a Discount?

When shares are issued at a price lower than the face value, they are said to be issued at a discount. Thus, the excess of the face value over the issue price is the discount amount.

The issue of shares at a discount means the issue of the shares at a price less than the face value of the share. For example, if a company issues a share of Rs.100 at Rs.90, then Rs.10 (i.e., Rs 100—90) is the discount amount.

It is nothing but a loss to the company. One must remember that the issue of shares below the Market Price (MP) but above the Face Value (FV) is not termed as 'Issue of Shares at Discount.'

The issue of Shares at a Discount is always below the Nominal Value (NV) of the shares. The company debits it to a separate account called 'Discount on Issue of Share' Account.

Why would a Company Issue its Shares at a Discount?

So, the answer is there's a concept of minimum subscription, which means the minimum number of shares that a company needs to get out of the entire issue by the date of closure.

Or

The minimum amount that must be subscribed by the public so that the company can allot shares to the applicants is termed 'minimum subscription,' which is to raise 90% of the issue amount as of now.

In order to achieve that, when a company that is new in the financial market or a company that has doubts over its reputation wants to raise funds from the public and has a doubt that it might not be able to achieve that minimum subscription clause.

Owing to this, they started offering their shares at a discount to accomplish that condition of minimum subscription, and that is why it is prohibited. Let's discuss this in brief.

Why is the issue of shares at a discount prohibited?

Discounted prices may be offered when a company cannot pay its debts and offers its share to its creditors. Company Act 2013 strictly prohibited the companies from issuing shares at discounted prices. It invites penalties and imprisonment for directors. Recently the changes were made in the penalty provisions.

This regime is largely designed to protect creditors. In theory, a creditor should be able to review a company's statement of capital to check whether their capital assets will cover their liabilities. If shares are allotted at a discount, the share capital figure will not accurately reflect the actual position.

That has been dealt with in section 53 of the Companies Act 2013.

What is Section 53 of Companies Act 2013?

[Prohibition on the issue of shares at a discount.]

*53. (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 1[discount] shall be void.

2[(2A) Notwithstanding anything contained in sub-section (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 or the Banking (Regulation) Act, 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 or five lac rupees, whichever is less, and the company shall also be liable to refund all monies received with interest at the rate of twelve percent. per annum from the date of issue of such shares to the persons to whom such shares have been issued.]