FACULTY OF LAW

JAMIA MILLIA ISLAMIA

SESSION 2018-19

SEMESTER VI

ISSUE OF SHARES AT PREMIUM AND

TOPIC-
DISCOUNT
Table of Contents

1. INTRODUCTION...................................................................................................................................3
2. SHARES:...............................................................................................................................................4
3. TYPES OF SHARES................................................................................................................................5
3.1 Ordinary or Equity Shares :................................................................................................................6
3.2 Preference Shares:.............................................................................................................................7
3.3 Deferred or Founders’ Shares:...........................................................................................................8
4. SHARE CAPITAL....................................................................................................................................8
5. TYPES OF SHARE CAPITAL:.................................................................................................................10
6. TYPES OF ISSUES:...............................................................................................................................11
6.1 Issue to Public:.................................................................................................................................11
6.2 Bonus issue:.....................................................................................................................................11
6.3 Right issue:.......................................................................................................................................11
6.4 Conversion issue:.............................................................................................................................12
7. TERMS OF ISSUE OF SHARES..............................................................................................................12
7.1 Definitions.......................................................................................................................................12
8. ISSUE OF SHARES AT A PREMIUM (Section 52)..................................................................................13
8.1 Use of Premium...............................................................................................................................14
8.2 Bona fide reduction of share premium account..............................................................................15
9. ISSUE OF SHARES AT A DISCOUNT:....................................................................................................15
9.1 Punishment for contravention of Section 53...................................................................................17
10. Issue of Sweat Equity Shares (Section 54).....................................................................................17
10.1 Section 54, Companies Act, 2013...................................................................................................17
10.2 Why is the exception needed?.......................................................................................................18
11. Conclusion.....................................................................................................................................19
Bibliography...............................................................................................................................................20

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 1. INTRODUCTION
In financial markets, a share is a unit used as mutual funds, limited partnerships, and real estate
investment trusts. The owner of shares in the corporation/company is a shareholder (or
stockholder) of the corporation. A share is an indivisible unit of capital, expressing the
ownership relationship between the company and the shareholder. The denominated value of a
share is its face value, and the total of the face value of issued shares represent the capital of a
company1 which may not reflect the market value of those shares.

The income received from the ownership of shares is a dividend. The process of purchasing and
selling shares often involves going through a stockbroker as a middle man. There are different
types of shares such as equity shares, preference shares, bonus shares, right shares, employees
stock option plans and sweat equity shares.

In financial markets, a stock is a unit of account for various investments. It often means the stock
of a corporation, but it is also used for collective investments such as mutual funds, limited
liability companies, and real estate investment trusts. Companies issue shares that are offered for
sale to increase share capital. The owner of shares of the corporation is a shareholder (or
shareholder) of the corporation. An action is an indivisible unit of capital, expressing the
ownership relationship between the company and the shareholder. The denominated value of a
share is its nominal value and the total of the nominal value of the shares issued represents the
capital of a company, which may not reflect the market value of such shares. The income
received from ownership of shares is a dividend. The process of buying and selling stocks often
involves going through a broker as a middle man. Stocks are valued according to different
principles in different markets, but a basic premise is that a stock is worth the price at which a
transaction would likely occur. Stocks were to be sold. The liquidity of the markets is an
important consideration as to whether an action can be sold at any given time. A real sale
transaction of shares between the buyer and the seller is generally considered to provide the best
prima facie indicator of the market as to the "true value" of the shares at that particular time.

The original value of a share printed in the certificate of the share is called itsface value or
nominal value (inshort, NV). The NV of a share is also known as register value, printed value

1
"Chapter 22 Company-An Introduction" (PDF). Accountancy. Noida, Uttar Pradesh, India: National Institute of
Open Schooling. 2008. p. 242. Retrieved 24 August 2011.

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and par value. The price atwhich the share is sold or purchased in the capital market through
stock exchanges is called itsmarketvalue (in short, MV). A share is said to be: At premium or
Above par, if its market value is more than its face value. At par, if its market value equals
its face value. At discount or Below par, if its market value is less than its face value.The share
of a company that is doing well or expected to do well is sold in the market at a price higher
thanits NV. In such a situation, we say the share is at premium or above par. For example, if a
share of NV ofRs 10 is selling at Rs 16 then the share is at a premium of Rs 6. The share of a
company that is neitherdoing well nor poorly is sold in the market at a price equal to its NV. 

2. SHARES:
A share is defined as the interest of members in a company which is measured in monetary term
for the purpose of the holders’ entitlements and indebtedness (entitlements in form of dividend
and indebtedness in form of liabilities). Shares are units of ownership of a limited liability
company. They are small uniits, each of equal amounts, into which the capital of a company is
divided. In other words, a share in a company is the certificate of interest that an individual has
in company.

The division of capital of a company into shares enables a variety of persons to take up the
shares of the company, each according to his liability. Share capital therefore means capital of a
company shared by many members. A company raises its capital either by subscription amongst
the friends of the promoter or by public offer. Sometimes, the shares are issued to existing
shareholders either free of charge or for cash consideration. At other times, the shares of a
company may be issued to persons owed by the company in settlement of such liabilities.
Therefore, one should understand that, different classes of shares are issued by a company, these
are discussed further.

3. TYPES OF SHARES
Capital must be divided into shares of a fixed amount. All the shares may be of only one class or
may be divided into two different classes of securities. For this purpose securities means

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securities defined in Section 2(h), Securities Contracts (Regulation) Act, 1956 (S. 2(81)) and
includes "hybrids”. The Act permitted only two kinds of shares to be issued, namely2-

1. Equity shares capital, that is, ordinary shares, and

2. Preference shares, which constitute the preference share capital

Ordinary share capital or "equity share capital" is defined in the Act as meaning all share capital
which is not preference share capital.

The share capital of a company limited by shares shall be of two kinds only, namely: (a) equity
share capital with voting rights, or (ii) with differential rights as to dividend, voting as otherwise
in accordance with such rules and subject to such conditions as may be prescribed. (b) preference
share capital. [S. 43].

The Companies (Amendment) Act, 2000 introduced some other categories of shares:

Derivative-Which has been given the same meaning as in Section 2, Securities Contracts
(Regulation) Act, 1956. [S. 2(33)]

Hybrid- It means any security which has the characteristics of more than one type of security,
including their derivatives.

3.1 Ordinary or Equity Shares :

Equity shares means that part of the share capital which is not a preference share capital. It
means all such shares which are not preference shares. Equity shares are also called as ordinary
shares.

All companies are expected to have shares since they carry-rate. Ordinary shareholders may
receive a dividend which varies according to the amount which the directors recommend. The
2
Section 65 gives the power to an unlimited company on getting itself registered as a company to increase the
nominal amount of its share capital by increasing the nominal value of shares provided that the increased amount
shall not be called up except for the purposes of winding up. The company can provide that a specified portion of
uncalled capital shall not be capable of being called up except on winding up.

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holders of these are not automatically entitled to dividend or return on their share capital even
when there is profit unless such dividend is declared and approved by the directors of the
company. When approved by the directors, ordinary shareholders receive dividend only after the
preference shareholders have received their dividend. They are regarded as the risk bearers
because they bear the heaviest loss in the event of liquidation of the company. On the other hand,
the surplus of assets in the event of liquidation belongs solely to ordinary shareholders unless the
Article of Association stipulates otherwise.

Preference shares, particularly redeemable preference shares, are more like debentures than like
shares. They are entitled to a fixed rate of dividend even as debentures earn a fixed rate of
interest. The company may choose to pay them back,3 but ordinary shareholders cannot be paid
back except under a scheme involving reduction of capital. [S. 66]

Secondly, an ordinary shareholder is entitled to vote on all matters affecting the company. But
the right of a preference shareholder to vote is restricted to resolutions which directly affect the
rights attached to his preference shares, except when dividend has remained unpaid in which
case he may vote on any resolution in respect of preference share capital.4

Thirdly, preference shares offer a profitable and safe source of investment. While the fixed rate
of income is guaranteed, the risk involved is much less as compared to the risk undertaken by an
ordinary shareholder.

3.2 Preference Shares:

Some companies in addition issue preference shares which do not normally carry rate and are
entitle only to a fixed rate of dividend. Holders of this type of shares receive dividends at
specified rates. The dividends are receive ahead of ordinary shareholders, and are not entitled to
participate in the surplus in event of liquidation unless the Article of Association stipulates
otherwise.

Preference shares are those shares which fulfill both the following two conditions:
3
S. 55. This, however, does not mean that the holder of redeemable preference shares can treat himself like a
creditor if his shares are not redeemed in time on maturity and the liberty of filing a creditor's petition for an order
of winding up. Lalchand Surana v Hyderabad Vanaspati Ltd,(1990) 69 Comp Cas 415 (AP)
4
S. 47(2) (Provisos).

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 (i) They carry preferential share right in respect of dividend at a fixed rate,

(ii) They also carry preferential right in regard to payment of capital on winding up of
the company.

Preference shares can be further classified as follows:

(1) Cumulative Shares: If in any year the profits are insufficient to pay the preference
dividend then in case of cumulative preference shares this dividend can be paid in the
subsequent year before any other dividend is paid. In other words the right to receive the
dividend goes on accumulating till it is paid. These are preference shares in respect of
which unpaid arrears of dividends are accumulated yearly and carried forward until
profits are available to pay the dividends at which time the whole of the accumulated
preference dividends must be paid before ordinary dividends.

(2) Non – Cumulative Shares: In case of Non – cumulative preference shares the dividend
can be paid only in that year. If there are insufficient profits then such preference
shareholders do not get any dividend for that year. These are shares in respect of which
unpaid arrears of dividends are not carried forward if there are no profits to pay the
dividends in any year.

(3) Participating Preference Shares: Participating preference shares are entitled to

participate in the surplus profits remaining after the payment of (a) Fixed dividend to
Preference shareholders and (b) Dividend to the equity shareholders. They are also
entitled to participate in the surplus funds remaining at the time of winding of the
company after payment of (a) Preference share capital & (b) Equity Share Capital. The
participative preference shares, therefore, are those classes of preference shares that will
take their own dividend allow the ordinary shareholders to take theirs and later share out
of the remaining surplus after the ordinary share has been given a fixed rate of dividend.
This means that, when participative preference shares are issued, there must be a fixed
rate of return on the ordinary shares.

(4) Non – participating preference shares: Non – participating preference share are not
entitled to participate in the surplus profits or surplus funds left over at the time of

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 winding up. Non-participative preference shareholders will not share out any surplus
arising, whether the business is a going concern or at liquidation.

(5) Redeemable preference shares: These are preference shares which the company is
under obligation to repay at a specified date. They cease being members of the company
and the certificate of shareholdings will be taken away from them.

(6) Irredeemable preference shares: These are preference shares which the company is
under no nay obligation to repay back at later date. They will remain permanently as
capital in the company as long as the company exists.

3.3 Deferred or Founders’ Shares:

A deferred share is a type of share which is taken over by the promoters (persons who undertake
to take part in forming a company or with regard to a proposed or newly formed company
undertakes a part in raising capital for the company) or those that floated the company. When
differed shares are issued, the holders bear more risk than the ordinary shareholders and for the
purpose of dividend they are not entitled to receive dividends until ordinary shareholders have
received their dividends. They are entitled to attend and vote at the company’s Annual General
Meeting (AGM).

4. SHARE CAPITAL
Share capital is not a necessary condition of incorporation, although greater number of
companies are registered with it than without it. In case share capital is thought necessary, the
memorandum must state the amount of capital with which the company is desired to be
registered and the number of shares into which it is to be divided.5 Authorised share capital or
nominal capital means such capital as is authorised by the memorandum of a company to be the
maximum amount of share capital of the company.6 The meaning of "share capital" was
explained by the Kerala High Court in SNDP Yogam, Quilon, re:7

5
S.4(1X) S. 44 says that the shares or debentures or other interest of a member in the company shall be movable
property transferable in the manner provided in the company’s articles.
6
Section 2(8) Companies Act, 2013.
7
(1970) Comp Cas 60: ILR 1969 Ker 516: (1970) 1 Comp LJ 85.

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 An application was presented under Section 397 [1956 Act] against “Yogam" and
the question was whether the company was with or without share capital.
According to the memorandum the liability of the members was limited; each
member was required to take at least one share, but no authorised capital was
mentioned.

The court quotes from Buckley on The Companies Acts and from Palmer’s Company Law to
find support for the proposition that the words "capital” and "share capital" are synonymous. For
a company to have share capital it is necessary that its memorandum should state the amount and
its division. Thus, share capital is different from membership fee, even if the payment is
symbolised by the issue of a share.

The amount stated in the memorandum becomes the authorised capital of the company. The
whole or any part of it may be issued. Supposing that only half of it is issued, then that is the
issued capital of the company.8 If the offer of issue is made to the public the whole of it may not
be taken up. That part of the issued capital which has been allotted is the subscribed capital. The
company need not immediately call up the whole amount. The called-up capital means such part
of the capital which has been called for payment.9The actual amount received is the paid-up
capital. According to Section 2(64) "paid up share capital" or "share capital paid up" means such
aggregate amount of money credited as paid up as is equivalent to the amount received as paid
up in respect of shares issued and also includes any amount credited as paid-up in respect of
shares of the company, but does not include any other amount received in respect of such shares,
by whatever name called.

The uncalled capital of a company can be converted into reserve capital. By passing a special
resolution the company may declare that a portion or whole of its uncalled capital shall not be
called except in the event of the company's winding up. Such a capital cannot be called except in
winding up; it cannot be converted except with the leave of the court; it cannot be charged by the
directors. Thus, where a company issued debentures charging its undertaking including the
uncalled capital, it was held that the charge was not operative on the reserve capital.10

8
Section 2(50)
9
S. 2(15)
10
Mayfair Property Ltd re.(1898) 2 Ch 28189599 All ER Rep 738

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 5. TYPES OF SHARE CAPITAL:
(i) Authorized/Registered capital: This is the amount of capital (stipulated in the
memorandum of association) as the maximum which the company has been authorized to
issue. The authorized share capital will be stated both in units and in value. This is the
Maximum Capital which the company can raise in its life time. This is mentioned in the
Memorandum of the Association of the Company. This is also called as Registered Capital
or Nominal Capital.

(ii) Issued capital: Issued capital is a part of the authorised capital which is issued to the public
for subscription.

(iii) Subscribed Capital: The issued capital may not be fully subscribed by the public.
Subscribed Capital is that part of issued Capital which has been taken off by the public i.e.
the capital for which applications are received from the public.

(iv) Called-up capital: This is the portion of the issued share capital which are the directors
have called upon the alottees to pay the installment due. The Company may not need to
receive the entire amount of capital at once. It may call up only part of the subscribed capital
as and when needed in installments. Called – up Capital is the part of subscribed capital
which the company has actually called upon the shareholders to pay. Called – up Capital
includes the amount paid by the shareholder from time to time on application, on allotment,
on various calls such as First Call, Second Call, Final Call etc. The remaining part of
subscribe capital not yet called up is known as Uncalled Capital. The Uncalled Capital may
be converted, by passing a special resolution, into Reserve Capital, Reserve Capital can be
called up only in case of winding up of the company, to meet the liabilities arising then.

(v) Uncalled-up capital: This is the portion of the issued share capital which the company has
not demanded from the shareholders.

(vi) Paid-up capital: This is the portion of the called-up capital which has been paid-up by the
alottees. The Called-up Capital may not be fully paid. Some Shareholders may pay only part

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 of the amount required to be paid or may not pay at all. Paid-up Capital is the part of called-
up capital which is actually paid by the shareholders. The remaining part indicates the
default in payment of calls by some shareholders, known as Calls in Arrears.

(vii) Reserved capital: This is the portion of the share capital which the company has decided
not to demand from the shareholders until the company is winding up.

6. TYPES OF ISSUES:
6.1 Issue to Public: This is the issue of shares of a company to members of the public who
are not yet shareholders of the public who are not yet shareholders of the company.

6.2 Bonus issue: This is the issue of full-paid shares of a company to existing shareholders in
proportion to their existing shareholding. Bonus shares are issued to shareholders free of charge.
The shares are paid from the existing reserves of the company. Bonus issue is sometimes referred
to as capitalization issue or script issue.

6.3 Right issue: This is the issue of shares of a company to existing shareholders in proportion
to their existing shareholding at a price known as right price. The rights price is usually higher
than the par value but lower than the market value (market price). In a right issue, a shareholder
may take up the right (i.e takes of the shares allotted to him and pays the required sum to the
company), renounce the rights (i.e authorizes the directors must then pay to the shareholder who
renounced the rights any amount received above the right price. A shareholder can also see the
rights himself to any interested person (s) for an agreed amount. Thereafter, the person (s) to
whom the rights are sold shall pay the rights price to the company.

6.4 Conversion issue: This is the issue of share of a company in exchange for convertible
securities of the company such as convertible debentures. An advantage of this kind of issue to
holders of such securities is that it enables them to acquire the company’s shares as well as the
benefits accruing to shareholders. The advantages of conversion issue to the company include the
fact that it is thus able to settle its debt without paying cash.

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 7. TERMS OF ISSUE OF SHARES
Before listing the different ways of issues of shares, we must understand the terms used in the
process.

7.1 Definitions
The definitions of terms of issue-

o Issue price: This is the price at which shares are issued to subscribers.

o Par value (nominal value): This is the face value of the shares as stated in the
memorandum of association of the company. This represent the minimum amount which
each share of the company can be sold out to shareholders except when the shares are
sold out at a discount.

o Conversion price: This is the price at which shares are exchanged for convertible
securities.

o Share premium: This is the excess of issue price over nominal value of shares. Only
strong and profitable companies issue shares at a premium.

o Market value: This represents how each share of the company is worth in the stock
exchange market. Not all shares have market value, only those shares of the company are
quoted that have value.

o Call: This represents the amount demanded on each share of the company at any
particular time when the company needs the money.

A limited company may issue the shares on following different terms.

 Issue of Shares for Consideration other than cash or for cash or on capitalization of
reserves.

 Issue of Shares at par i.e. at face value or at nominal value.

 Issue of Shares at a Premium i.e. at more than face value.

 Issue of Shares at a Discount i.e. at less than the face value.

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 8. ISSUE OF SHARES AT A PREMIUM (Section 52)
If the market exists, a company may issue its shares or securities at a price higher than their
nominal value. There is no restriction whatever on the sale of shares at premium. When the
shares are issued at a price higher than the nominal value of the shares then it is called as shares
issued at a premium. The amount of premium is decided by the board of Directors as per the
guide lines issued by SEBI. SEBI Guidelines indicate when an issue had to be at par and when
premium is chargeable.11

Premium may be received in cash or in kind. Where the value of the assets received by a
company as a consideration for allotment is greater than the nominal value of shares, it is in
essence an allotment at a premium. An amount equal to the extra value of assets would have to
be carried to the securities premium account.12 The Act does regulate the disbursement of the
amount collected as premium. It is clearly provided that the amount so received, whether in cash
or in kind, shall be carried to a separate account to be known as the Securities Premium Account.
The amount to the credit of share premium account has to be maintained with the same sanctity
as share capital and can be reduced only in the manner of share capital. 13 Although Securities
Premium is a profit to the company, it is not a revenue profit, it is treated as capital profit.

8.1 Use of Premium

Liberty is, however, given to use the fund in the following five ways:

1. It may be applied to issue to the members as fully paid by way of bonus the unissued
shares of the company.14

2. It may be used to write off preliminary expenses.

11
SEBI guidelines for disclosure and Investr Protection, S.A.
12
Head (Henry) & Co Ltd. V. Ropner Holdings Ltd, 1952 Ch 124: (1951) 2 All ER 994
13
The decision of the Court of Appeal in Ransames plc, re (1999) 2 BCLC 591 (CA) affirmed the decision of the
court below in sanctioning reduction of share premium account irrespective of irregularities like short notice of
meeting, increasing the number of shareholders to assure smooth passage of the resolution and highly abbreviated
notice, because the interests of the shareholders were not prejudiced there being otherwise good resources for paying
them back in full in case of need. Dividends cannot be paid out of the premium amount, Drown v Gaumont-British
Picture Corp Ltd, 1937 Ch 402; Duffe Settlements, re, 1951 Ch 923: (1951) 2 All ER 534 (CA): Shearer v Bercain,
(1980) 3 All ER 295
14
EIC Services Ltd v Phipps, 2004 EWCA (Civ) 1069: (2005) 1 WLR 1377 (CA), bonus shares were not allowed to
be issued by capitalisation of the share premium account without authority of an ordinary resolution of the company
and to shareholders whose shares were not fully paid. It could not be regularised by an agreement of the
shareholders

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 3.  It may be used to write off expenses of, commission or discount account.

4. It may be spent in providing for the premium payable on the redemption of preference
shares or debentures of the company.
5. For purchase of its own shares or other securities under Section 68.

Section 52(3) provides that securities premium account may also be applied by such class of
companies as may be prescribed and whose financial statements comply with the accounting
standards prescribed for such class of companies under Section 133 for the following:
(a) in paying up unissued equity shares of the company to be issued to members as fully paid
bonus shares; or (b) in writing off expenses of or commission paid or discount allowed on any
issue of equity shares of the company; or (c) for purchase of its shares or other securities under
Section 68.
A reduction of the premium account was allowed under a scheme which experts had approved as
fair, just and proper.15 Reduction of the share premium account for wiping out losses incurred in
trading in securities was allowed. The articles of association enabled the company to reduce its
share premium account. The reduction of capital did not involve either diminution of liability in
respect of unpaid capital or payment to any shareholder paid up capital. Creditors and
shareholders raised no objections.16

8.2 Bona fide reduction of share premium account

The company proposed to write off accumulated losses by utilising the share premium account
and by reducing the face value of its shares. The need and purpose of reduction was duly
explained and discussed at an extraordinary general meeting at which a special resolution was
unanimously passed. The company had no secured creditors. The unsecured creditors had given
their written consent. Nothing was shown to be there either against public interest or against law.
The court allowed the proposed reduction.17 The share premium account is treated as paid up
share capital for a limited purpose. But not as a reserve fund. A company can be allowed to write

15
Lee Tele Films Ltd, re, (2005) 124 Comp Cas 102 (Bom)
16
Hyderabad Industries Ltd, re (No. 2), 2004 CLC 13852005123 Comp Cas 458 (AP)
17
India Infoline Ltd, re, (2004) 53 SCL 396: (2004) 6 Bom CR 411 (Bom).

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off or adjust a loss against share premium account if there is no diminution of the share capital
account and corresponding reduction in the share premium account.18

9. ISSUE OF SHARES AT A DISCOUNT:

When Shares are issued at a price lower than their face value, they are said to have been issued at
a discount.

For example, if a share of Rs 100 is issued at Rs 95, then Rs 5 (i.e. Rs 100—95) is the amount of
discount. It is 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.

Generally speaking, the Companies Acts have always discouraged issue of shares for a price less
than their face value. Allotment of shares at a discount is ultra vires19 and, therefore, the allottees
who have been put on the register of members become bound to pay the full value of their
shares.20

But a contract to take shares at a discount is not enforceable.21 Law does not tolerate issue of
shares at a discount even in an indirect way. Thus where a company issued debentures at a
discount, which is allowed by the Act, and gave each debenture holder the right to convert his
debentures into shares, it was held that it was a colourable scheme for issuing shares at a
discount and, therefore, was not legal.22

A company may however issue shares at discount subject to the following restrictions-

(a) The shares of the class issued for the first time are not allowed to be sold at a discount.
Discount is permissible only if the company has already once issued shares of that class
earlier at full value. The issue must be of a class of shares already issued.

18
Global Trust Bank Ltd, re, (2005) 57 SCL 164: 2005 CLC 353: 2005127 Comp Cas 604 (AP)
19
Section 53 of the Companies Act 2013
20
Ooregum Gold Mining Co of India v. Roper, 1892 AC 125: 66 LT 427 (HL).
21
Sandys, ex p,(1889) 42 Ch D 98: 61 LT 94
22
Mosely v Koffiefontein Mines Ltd, (1904) 2 Ch 108: 91 LT 266

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 (b) The issue of share at a discounted price shall be void except in case of issue of sweat
equity shares under Section 54 of the Act.

(c) The company has to file a petition to the Central Government seeking sanction of the
resolution.

(d) The resolution must specify the maximum rate of discount at which shares are intended to
be issued.

(e) On sanction having been received from the Central Government, the shares at a discount
must be issued within two months from the date of sanction, or within such extended time
which the government allows.

(f) The government may while sanctioning the issue of shares at discount, impose terms and
conditions as it deems necessary.

When shares are issued at a discount, the Share Capital A/c is credited with the
face value of the share in full & Discount on Issue of Shares is shown on the assets
side of the balance sheet under the head ‘Miscellaneous Expenditure’. It
preferably, should be written off as early as possible through the Profit and Loss
A/c or Securities Premium A/c. The balance amount not written off will appear in
the Balance Sheet as fictitious asset.

9.1 Punishment for contravention of Section 53

Where a company contravenes the provisions of this section, 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.23

Section 53 of the 2013 Act permits no concession for discount issues. It clearly says that no
company is to issue shares at a discount. Any such issue is void. [S. 53(1)(2)] Subs-s (3) provides

23
Section 53(3) of the Companies Act 2013

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penalty for violation of the section. The section makes exception for issue of sweat equity shares
under Section 54.

10. Issue of Sweat Equity Shares (Section 54)

“Sweat equity shares" means such equity shares as are issued by a company to its directors or
employees at a discount or for consideration, other than cash, for providing their know-how or
making available rights in the nature of intellectual property rights or value additions, by
whatever name called. [S. 2(88)]

A new Section 79A was inserted by the Companies (Amendment) Act, 1999 providing for issue
of Sweat Equity Shares by a company incorporated, formed and registered under the Companies
Act and also included its subsidiary companies incorporated in a country outside India.

As provided in Explanation to the section, the term sweat euity shares connote the shares issued
by the company to employees or directors at a discount or for consideration other than cash for
providing know-how or making available rights in nature of intellectual property rights or value
additions.

10.1 Section 54, Companies Act, 2013

Similar provision has been incorporated in Section 54 of the Companies Act, 2013 which
provides that a company may issue sweat equity shares of a class of shares already issued subject
to the compliance of the following conditions-

(a) The issue is authorised by a special resolution passed by the company in the general
meeting.

(b) The resolution specifies the number of shares, the current market price, consideration, if
any, and the class or classes of directors or employees to whom such equity shares are to
be issued;

(c) Not less than 1 year has elapsed from the date on which the company became entitled to
commence business.

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 (d) Where the equity shares of the company are listed on a recognised stock exchange, the
sweat equity shares are issued in accordance with the regulations made by the Securities
and Exchange Board in this behalf and if they are not so listed, the sweat equity shares
are issued in accordance with such rules as may be prescribed.

Section 54(2) says that the rights, limitations, restrictions and provisions as are for the time being
applicable to equity shares shall be applicable to the sweat equity shares issued under this section
and the holders of such shares shall rank pari passu with other equity shareholders.

Provided that in case of a company whose equity shares are not listed on any recognized Stock
Exchange, the sweat equity shares are issued in accordance with the guidelines as may be
prescribed.

10.2 Why is the exception needed?

One may wonder the reason behind giving an exception to the issue of shares at discount. The
following reasons may be advanced for the same-

1. The promoters of a company are not allowed to withdraw any remuneration or salary as
per companies act. Hence, in order to reward them for their relentless services, there is a
provision in the companies act where the shares can be issued to promoters at discounted
rate.

2. Also in case of employees or directors who have been working hard for the progress of
the company and who have contributed in the form of intellectual property rights or value
additions, the issue of shares at discount is allowed to help the companies retain them by
rewarding them shares at discounted amount.

Hence the name ‘Sweat’ equity.

11. Conclusion
A company issues its shares to the general public through an invitation called prospectus. The
prospectus states, besides others, the number of shares offered to the public and the face value of
the shares. Generally, the shares of the company are issued in cash. However, sometimes, shares

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are also issued for considerations other than cash, such as for the purchase of assets and for the
purchase of business. There is mostly three-steps in the the collection of the money of shares
which are- share application, which is done during accepting the first installment of the
company; second being, share allotment, which is taken when the share rights are given to the
investor; and finally call for money which is the remaining amount of share to be paid.

The issuance of shares can be done at par or at discount or at premium. When Shares are issued
at a price lower than their face value, they are said to have been issued at a discount. When
shares are issued at a price higher than their face value, they are said to have been issued at a
premium. Issuing shares at premium is allowed under the Companies Act, 2013 but the Act
restricts the issue of shares at discount. This is done so that a company which is not doing well in
business does not attract investors by way of discount. An exception to the issue of shares at
discount is made in the form of sweat equity shares in Section 54 of the Act. These are the shares
which are issued by a company to its directors or employees at a discount or for consideration,
other than cash, for providing their know-how or making available rights in the nature of
intellectual property rights or value additions. These concepts were discussed in detail in this
project.

Bibliography

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Books:

 Dr. Avtar Singh, Company Law, Eastern Book Company, Seventeenth Edition, 2018

 Dr. N. V. Paranjape, The New Company Law, Central Law Agency, Allahabad,
Seventeenth Edition, 2016

 A. Ramaiya, Guide to Companies Act, Seventeenth Edition, Part II, 2010

 The Companies Act, 2013, Bare Act

Online Sources:

 www.advocatekhoj.com

 www.corporatelawreporter.com

 www.blogipleaders.in

 www.sol.du.ac

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