Section 2(84) of the Companies Act 2013, defines “Shares” as, “Share” means a share in the share capital of a company including stocks. Investors invest in shares because it can give huge profits to them unlike the fixed rate of return on debentures. There are various ways or prices at which a company issues its shares like at par, at a premium and at discount. In this article, we shall understand the issue of shares at premium and discount. Accounting of these issues will be discussed in upcoming articles.
Face value of a share is the par value of the share. It is also known as the Nominal value or denomination of a share. To issue shares a company follows a definite procedure which is controlled and regulated by the Companies Act and Securities Exchange Board of India (SEBI). A company’s shares can be issued at par, at a premium, or even at a discount. When the stock is sold at its nominal value, it is said to be at par. The premium is the amount paid for shares sold at a higher price than their nominal value. Shares sold at a discount, of course, are less expensive than their face/nominal value.
a) Issue of Shares at par:
When the shares are sold at their nominal value, then they are said to be issued at par. For example, if the face value of shares is ₹100 each and they are issued at ₹100 each, then it will be Issue of Shares at Par. Generally new companies issue their shares at par.
b) Issue of Shares at Premium:
A company may issue securities at a premium when it is able to sell them at a price above par or above face value, for example, ₹ 100 per share at a price of ₹ 120, thereby earning a premium of ₹ 20 per share. Here the company is issuing shares at 20% premium. Companies that are financially solid, well-managed, and have a positive market reputation typically issue their shares at a premium.
The Act, does not stipulate any conditions or restrictions regulating the issue of shares by a company at a premium. However, the Act does impose conditions regarding the utilization of the amount of premium collected on securities. Firstly, the premium cannot be treated as profit and, therefore, cannot be distributed as dividend. However, the same can be capitalized and distributed in the form of bonus shares. Secondly, the amount of premium, whether received in cash or in kind, must be recorded in a separate account, known as the “securities premium A/c”. Thirdly, the amount of share premium is to be maintained with the same sanctity as the share capital.
Since the premium is not part of the Share Capital, it must be credited to a separate account called Securities Premium A/c. It’s a gain for the corporation. According to the Companies Act of 2013, the credit balance of the Securities Premium A/c is shown on the liabilities side of the Balance Sheet under the heading ‘Reserves and Surplus.’ Section 52 of the Companies Act of 2013 explains how a business can employ the Securities Premium. According to Section 52 (2), the share premium can be utilised only for:
- issuing fully paid bonus shares to members.
- writing off the balance of the preliminary expenses of the company;
- writing off the commission paid or discount allowed, or expenses incurred on issue of shares or debentures of the company;
- providing for the premium payable on redemption of any redeemable preference shares or debentures of the company.
- for the purchase of its own shares or other securities under section 68.
In Re. Hyderabad Industries Ltd., [2004] 53 SCL 376 (AP) case, the Court held that unless articles of association of company permit utilization of share premium account for purposes other than mentioned in Section 52 of the Act, company court cannot approve resolution to that effect. Court further held that unless and until there is diminution of the share capital and corresponding reduction of the share premium account, no company can be allowed to write off or adjust the loss against share premium account.
In Re. Mangalam Cement Ltd., [2008] 86 SCL 153 (Raj.). case, Rajasthan High Court has held that a company can utilize credit balance in securities premium account for purpose of meeting deferred tax liability.
c) Issue of Shares at Discount:
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, the shareholder pays ₹ 9 on a share of nominal or face value of ₹ 10, then the share is said to be issued or sold at a discount. It is nothing but a loss to the company.
It should be noted that the issue of share below the market price but above face value is not termed as ‘Issue of Share at Discount’ Issue of Share at Discount is always below the nominal value of shares. It is debited to separate account called ‘Discount on Issue of Share’ Account.
According to Section 53 of the Act prohibits the issue of shares at discount as it states in its clause (2) that any share (which means either equity share or preference share) issued by a company at a discounted price shall be void.
Conclusion:
Section 54 allows only ‘sweat equity shares’ to be issued at a discount and that too subject to compliance of the specified conditions. Any share issued by a company at a discounted price shall be void. A company may, however, issue shares at a discount to its creditors, when debt is converted into shares or debt restructuring scheme as per RBI regulations. Thus, if a company issues any shares, except sweat equity shares, as aforesaid, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer who is in default shall be punishable with 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 with both (Section 53 (3)).
A company’s shares can be issued at par, at a premium, or even at a discount. When the stock is sold at its nominal value, it is said to be at par. The premium is the amount paid for shares sold at a higher price than their nominal value. Shares sold at a discount, of course, are less expensive than their face/nominal value.
When shares are issued at premium, the amount of premium, whether received in cash or in kind, must be recorded in a separate account, known as the “securities premium A/c” and the amount of share premium is to be maintained with the same sanctity as the share capital. It can be utilized for the purposes given in Section 52 of the Act. Section 53 of the Act forbids issue of shares at a discount with exceptions given in Section 54 of the Act.