12.6.11 (Issue of Shares at Par, at Premium and at Discount)

A company may issue shares at par, or at premium, or at a discount. Issue at par. Shares are deemed to have been issued at par when subscribers are required to pay only the amount equivalent to the nominal or face value of the shares issued. For instance, if the face value of a share is Rs 10 and the buyer is required to pay thereon Rs 10 only - nothing more nothing less - then he will be said to be holder of a share issued at par

According of SEBI guidelines of 11^th June 1992, a new company set up by entrepreneurs (individuals) without a track record can issue shares only at par. Likewise, issues of existing private/closely held and other unlisted companies without three years track record of consistent profitability (including disinvestments by offer to public) are only allowed to be priced at par. Again, issues of new companies set-up by existing unlisted companies without a 5 year track record of consistent profitability can be made only at par.

Issue at a premium. In the above example, if the buyer is required to pay more than

the face value of the share, e.g., Rs 12.50 on a share of Rs 10, then the share is said to be issued or sold at a premium.

The Companies Act, 1956 does not stipulate any conditions or restrictions regarding the issue of shares by a company at a premium. However, it does impose conditions regulating the utilisation of the amount of premium collected on shares. Firstly, the premium cannot be treated as profit and, therefore, cannot be distributed as dividend. Secondly, the amount of premium received in cash and the equivalent of it received in kind must be kept in a separate bank account known as the 'Share Premium Account'. Thirdly, the amount of share premium is to be maintained with the same sanctity as the share capital. Fourthly, the share premium account can not be treated as free reserves as it is in the nature of capital reserve. Fifthly, the amount credited to the 'Share Premium Account' can be used only for the purposes listed in s.78(2).

In accordance with the provisions of s.78(2), the share premium can be utilised only for the following purposes: (i) to pay for unissued shares of the company to be issued to members of the company as fully paid bonus shares; (ii) to write off the preliminary expenses of the company; (iii) to write off the expenses or the commission paid or discount allowed on, any issue of shares or debentures of the company; (iv) to provide for the payment of premium payable on the redemption of redeemable preference shares or of any debentures of the company.

The issue of shares at a premium does not require the sanction of the Company Law Board. The company is, however, required to ensure compliance of SEBI guidelines in this regard.

SEBI has allowed a certain class of companies to make their issues at any premium subject, however, to certain conditions as to promoters contribution and lock in period.

The Companies (Amendment) Act, 1999 has amended s. 78 to the effect that for the word 'share' in the section, the word 'securities' shall be substituted.

Issue at a discount. If the buyer of shares is required to pay less than the face value of the share, e.g., Rs 8.50 on a share of Rs 10, then the share is said to be issued or sold at a discount. However, the issue of shares at a discount is regulated by law and s.79 provides for certain conditions subject to which shares can be issued at a discount. These conditions are:

            (1) The issue of shares at a discount is authorised by a resolution passed by the company in general meeting and sanctioned by the Company Law Board.

            (2) The issue must be of a class of shares already issued.

            (3) The maximum rate of discount must not exceed 10 per cent or such higher rate as the Company Law Board may permit in any special case.

            (4) Not less than one year has, at the date of issue, elapsed since the date on which the company was entitled to commence business.

            (5) The shares to be issued at a discount must be issued within two months of

the sanction by the Company Law Board or within such extended time as it may allow; and

            (6) Every prospectus at the date of its issue must mention particulars of the discount allowed on the issue of shares, or the exact amount of the discount as has not been written off. In case of default, the company and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees.