Section 53 of Companies Act. 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 ¹[discount] 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.]”

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Decoding the Section 53 of Companies Act

The shares are issued in the market for a certain fixed amount that cannot be changed. The section 53 puts a restriction on the company to sell the shares at a discounted rate than that of normal face value. Even if the company puts any sort of discount on the issue of shares, it will be declared as void as per section 53(2).

This implies that the minimum price at which the company can sell its shares is at the face value. In addition to ensuring equity, this approach makes sure investors contribute the full amount of capital planned for each share.

Reasons for the Prohibition: Protecting Stakeholders

There are several reasons that restricts the selling of shares at lower price than the face value. The reasons are: –

1. Protecting Investors:

The value of existing shares is diluted by the issuance of shares at a discount, which might adversely affect current shareholders.

2. Ensuring Fair Capital Raising:

It discourages companies from reducing share prices in an attempt to draw in investors, encouraging reasonable expectations and sound capital raising techniques.

3. Maintaining Financial Discipline: 

It motivates companies to refrain from unsustainable behaviours and handle their money sensibly.

Exceptions and Nuances of Section 53 of Companies Act

The provision 2A of the Act provides for the exception to general rule of selling the price at face value.

• Employees Stock Option Scheme (ESOS):

Under certain circumstances and with regulatory authority, companies may provide discounted shares to their employees.

• Swap or Conversion of Debentures/Debt:

In the event of a debt or debenture conversion process, shares may be issued at a discount.

• Bonus Issue: 

It specifies that bonus shares may be offered at a discounted price if the firm chooses to provide them, but the discounted price cannot be less than the share’s face value.

Reason for the Exception for Section 53 of Companies Act

The exceptions provided under the section are for a reason. The possible reason are as discussed: –

• Attract and retain talent:

The bonus shares incentivizes employees and aligns their interests with the company’s success.

• Resolve financial complexities:

Allowing reductions in certain debt-related conversions provides opportunities for restructuring and managing liabilities.

• Reward loyal shareholders:

Bonus issues with a discount recognize existing investors’ contributions while preserving total capital.

Penalty for non-compliance

The section 53 provides a penalty provision for the non-compliance of this section. The penalty will be given to: –

1. The Company
2. Every officer who is in default.

The penalty provided is: –

1. May extend to an amount which is equal to the raised amount through discounted shares.
2. Or, 5 lakhs, whichever is less and,
3. The company will also be liable to refund all the money that was received by them with interest of 12 % per annum.
4. Penalty to company: Fine not less than one lakh rupees but which may extend to five lakh rupees.
5. Punishment awarded to the officer in default: 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 both.

The calculation of interest will be done from the date of issue of share.

The Ripple Effect of Share Discounts

The prohibition on the discount of shares impacts various stakeholders. The impact on different stakeholders are as follows: –

• Companies:

Understanding the constraints and permissible exceptions can be crucial for navigating share issuance approaches and staying in accordance with regulations.

• Investors:

Making sensible investment selections is recommended and they are shielded from unjust dilution by being aware of their rights and the legal framework.

• Regulators:

One of the most important duties is still making sure businesses follow the Act and protect the interests of investors.

Amendments: that took place

There were two amendments that made changes in the section 53 of the Act. Both of the amendment are: –

1. Act 1 of 2018:

This amendment inserted a new sub-section in the existing section 53 as 2A. This provision provided scope for the exceptions for discounted share prices.

2. Act 22 of 2019:

This amendment substituted the pre-existing provision of penalty and punishment. The punishment provided under the previous provision was applicable for the company as well as to every officer which was in default.

Conclusion

All stakeholders can confidently navigate the complexities of share pricing by being aware of its core principles, exceptions, and recent developments. It is important to remember that upholding this provision promotes fair and responsible share issuance practices within the corporate landscape, encourages sustainable capital raising, and ultimately helps to maintain a healthy and well-regulated financial ecosystem.

FAQs

Q1) Why shares Cannot be issued at a discount?

There is a prohibition on the issuance of share at discount because of the following reason:

• Protecting Investors
• Ensuring Fair Capital Raising
• Maintaining Financial Discipline

Q2) Which shares can be given at discount?

The section 54 of the companies Act, 2013 provides that the sweat equity shares can be given at discount.

Q3) Is discount on issue of shares a capital profit?

The discount on issue of shares decreases the price of share from its face value therefore, it can be concluded that it does not amount to capital profit for a company.

Q4) Why is discount given on shares?

The main motive behind providing discount on share is to lure the investors towards the company.

Q5) What are the exceptions to which the discount on shares can be applied?

The exceptions to which the discount on shares can be applied are: –

• Employees Stock Option Scheme (ESOS)

• Swap or Conversion of Debentures/Debt
• Bonus Issue

Q6) Can shares be issued for free?

No, the shares cannot be issued for less than the face value of the share in market price.

Q7) Why do people buy shares at premium?

The people agree to buy the shares at premium because of two reasons: –

1. It is issued by the company having high market reputation.
2. These shares are well maintained and the investors get guaranteed dividends.

Q8) What are the two types of discounts?

The two types of discounts that are provided by the companies are generally: –

1. Trade discount
2. Cash discount