Prohibition on Issue of Shares at Discount

Section 53 of the Companies Act, 2013, lays down a strict prohibition on companies from issuing shares at a price lower than their face value. This is a significant departure from the earlier Companies Act, 1956, which allowed issue of shares at discount under certain conditions.

The rationale behind this prohibition is to:
🔹Maintain the integrity of share capital
🔹Prevent undue dilution of shareholder equity
🔹Avoid tax avoidance or fraud by underpricing equity
🔹Promote fair valuation and transparency in capital markets

✅ Who Can Issue Shares?
Under Section 53, any company, whether private or public, can issue equity or preference shares, but must do so at face value or at a premium. Issuing shares at a discount is not allowed—except in one specific situation (discussed below under exceptions).

📅 When Can Shares Be Issued at Discount?
As a general rule – Never.
However, only one exception is allowed, i.e., in case of issue of sweat equity shares, which is governed by Section 54.

How Can Companies Issue Shares (Legally)?
As per Section 53 and other applicable provisions:
✅ At Face Value: Shares are issued at nominal value (e.g., ₹10 for ₹10)
✅ At Premium: Shares are issued at a price above the nominal value (e.g., ₹10 share issued at ₹15 or ₹20)

❌ Not at Discount: A ₹10 share cannot be issued at ₹8 or ₹9
The securities premium collected must be credited to Securities Premium Account under Section 52 and used only for specific purposes like issuing bonus shares, writing off expenses, etc.

🔹 Legal Text of Section 53 (Extract)
“Except as provided in Section 54, a company shall not issue shares at a discount.”
Penalty: If any company contravenes the provisions of this section, the company and every officer in default shall be liable to a penalty equal to the amount raised through such issue of shares at a discount or ₹1 lakh, whichever is higher. Also, the company shall refund all monies received with interest @12% p.a. from the date of issue.

Why Shares at Discount Are Not Allowed?
Issuing shares at a discount leads to:
🔹Reduction in the actual capital base
🔹Loss to the company and its existing shareholders
🔹Undue advantage to new investors
🔹Possibility of tax evasion or manipulation

Hence, the Companies Act mandates capital integrity and investor protection by barring discounted issuance.