Discount on the Issue of Shares

Introduction

Companies can only thrive in the economy with adequate finance and funding. Money plays a crucial role not only in the establishment of an enterprise but also in its long-term survival.

Often, private sources of funds fall short of fulfilling a company’s financial needs. This is where the concept of shares comes into play.

One intriguing aspect of shares is the Issue of Shares at a Discount, which has garnered significant attention from shareholders, investors, and businesses. 

While it offers investors a unique opportunity to acquire shares at less than their face value, companies must consider the legal and regulatory implications before opting for this strategy. 

In this blog, we will explore what it means to issue shares at a discount, the governing laws, the motivations behind such decisions, and the potential impact on the company and its investors.

What does the Issue of Shares mean?

A corporation is said to be issuing shares at a discount when the price at which it does so is less than the face value of the share. 

For instance, if a share has a face value of Rs. 200 and the company issues it at Rs. 180, the discount offered by the firm on the issuance of each share is the difference of Rs. 20 (i.e., Rs. 200 – Rs. 180).

A form of loss for the business is the issuance of shares at a discount. It is essential to keep in mind that this situation does not qualify as an “Issue of Shares at Discount” if the shares are issued for a price that is higher than the Face Value (FV) but less than the Market Price (MP).

Shares offered at a discount always have values less than their nominal value (NV). The corporation debits the loss incurred from issuing shares at a discount to a different account known as the “Discount on Issue of Share Account.”

Requirements for Discounted Share Issue

The following are some requirements that must be met when a business offers its shares at a discount:

1. If a corporation wishes to issue shares at a price less than their face value, it must obtain approval from the appropriate government. To properly discuss this topic, the corporation must call and assemble a general meeting before requesting this approval.
2. Once the firm receives approval from the appropriate government, it is required to issue shares within 60 days. Nonetheless, the corporation may choose to prolong this period in specific circumstances; however, approval from the general assembly is still needed.
3. A company’s ability to use a discount rate while issuing shares is limited. A firm is prohibited from issuing shares at a discount of greater than 10% per the Companies Act of 2013.
4. Only when a year has passed after the start of the company’s operations can a company offer discounted shares.
5. Aside from this, the shares the firm wishes to issue should fall into the same class as the shares it has already released onto the market. For instance, in the event of a discount, the corporation may only issue equity shares this time around if it did so previously.
6. After receiving approval at the general meeting, the company must obtain the Central Government’s sanction.

When Is a Company Allowed to Issue Discounted Shares?

In our nation, issuing shares at a discount is not entirely forbidden. There are several circumstances in which a business may offer shares at a discount. Among them are the following.

Sweat Equity Shares

These are the shares that an organization awards to its employees or directors. Sweat equity shares are awarded to directors and employees to thank them for their efforts and contributions to the company’s expansion and improvement. 

A corporation may issue sweat equity shares at a discount following Section 2 (88) of the Companies Act of 2013.

ESOPs and these shares are not the same thing at all. To encourage and recognize staff members for their improved work and contributions to the company, sweat equity shares may be granted as a reward or an incentive. 

On the other hand, because they own stock in the company, ESOPs are only utilized to reward employees for producing better work.

Issuing Creditors Shares

A firm may convert its debt into shares and then offer shares to creditors at a discount under Section 53 (2A) of the Companies Act, 2013:

1. By any strategy for statutory resolution.
2. Or in a debt restructuring plan, in compliance with the RBI Act 1934 or the Banking Regulation Act 1949, as applicable rules or laws.
3. It is the most recent clause added by the 2017 Companies Amendment Act. The creditors will benefit from this adjustment as it gives them more freedom to convert their debt into discounted shares.

The Rights of Issue of Shares at Discount

A corporation could need more funding for various reasons, including growth and expansion. By Section 62 of the Companies Act of 2013, the firm may issue the rights shares at a discount.

When a corporation issues the appropriate shares, it first solicits its current shareholders; only if they decline to purchase can the company offer the shares to the market. 

The corporation distributes these shares at a discount to the going rate. Additionally, it raises the current shareholders’ interest in the business. Raising capital is the primary goal of issuing the appropriate number of shares. 

However, a business only issues them when raising capital for a significant acquisition or corporate development is necessary. Additionally, a company can use the appropriate issue to keep it from collapsing.

Selecting the appropriate issue offers the firm better leverage opportunities and a more extensive equity base. In addition, the technique lowers the company’s debt-to-equity ratio.

To compete with Airtel and Jio’s rights issues, Vodafone Idea issued its rights shares in 2019 at a steep discount. This is a real-world example of this. 

This right issue was priced at Rs. 12.50 per share with a face value of Rs. 25,000 crores. In India, this is the most significant discount a company has ever offered on the right problem. The shares were oversubscribed by 1.08 times.

The first-ever public offering

Initial Public Offer (IPO) is the price at which an unlisted company (which subsequently becomes a listed company) sets forth the terms of its share capital issue. When issuing IPOs, a corporation may provide its employees or retail customers a maximum 10% discount.

Following the IPO, the business may pursue a follow-on public offer (FPO), which is the process by which a company that has already listed can issue shares to its current shareholders. In this case, the business may provide retail investors discounts, but only up to a certain amount.

Sale or Offer (OFS)

OFS shares are transparently issued by a public business to dilute the promoters’ shareholding or holdings. This process is carried out under SEBI’s minimum public shareholding guidelines.

An investor must meet specific requirements to be eligible to apply for the OFS as a retail investor. The business may offer retail investors OFS at a discount rate per SEBI regulations.

The company must include the information on the discount offered on the OFS issue in the announcement notice. The bid price or the final allocation price are used to compute the OFS discount.

When Is a Company Not Able to Issue Discounted Shares?

Clause 2 of Section 53 of the Companies Act 2013 prohibits a corporation from issuing preference and equity shares at a discount. If a corporation violates the law, appropriate legal action against it and any defaulting officers may be taken. 

The penalty may be as much as five lakh rupees or the amount the company raised by selling the shares at a discount. In addition, the business must reimburse all funds raised to shareholders, plus interest at 12% per annum starting on the date the shares are issued.

The Companies Act of 1956 permitted a corporation to offer shares at a discount under Section 79, in contrast to the Companies Act of 2013. However, this could only be done with the Company Law Board’s previous approval.

Conclusion

The Companies Act 2013 has limited the use of discount shares for raising capital, limiting their application to exceptional situations like debt restructuring. Companies must find alternative methods to attract investors without violating legal provisions. 

Understanding the implications of discounted shares is crucial for investors, as they must consider the company’s long-term financial health and discount reasons. 

Discounted shares may become less common as regulations evolve, but creative financial solutions remain essential for businesses seeking expansion or recovery from financial difficulties.

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