Issue of Shares at Discount occurs when a company issues its shares at a price lower than their nominal or face value. This practice is generally restricted and can only be done under specific conditions allowed by law, such as in the case of issuing sweat equity shares or when a company is undergoing restructuring. The discount amount is recorded separately in the books as a “Discount on Issue of Shares” and is considered a capital loss. This loss can be written off against available reserves or future profits, depending on regulatory provisions.
Reasons of Issue of Shares at Discount:
Issuing shares at a discount, though generally restricted, is sometimes necessary for companies facing specific circumstances.
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Financial Restructuring
Companies undergoing financial restructuring or reorganization may issue shares at a discount to attract investors. This helps the company raise capital quickly, even if its financial condition is not strong enough to support issuing shares at their nominal value.
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Attracting Investors in Difficult Markets
In challenging economic conditions or depressed markets, issuing shares at a discount can be an effective strategy to attract investors. When market sentiment is low, companies might need to offer shares at a discount to entice potential shareholders and ensure successful capital raising.
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Rewarding Existing Shareholders
Companies may issue shares at a discount to reward loyal shareholders, especially in cases where the company is looking to raise additional capital from existing investors. This can serve as an incentive for shareholders to invest more, ensuring their continued support.
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Launching New Projects or Expanding Operations
To finance new projects, expansions, or acquisitions, a company might issue shares at a discount to raise the required capital quickly. This approach can be particularly appealing if the company’s current cash flow is insufficient to fund the expansion.
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Employee Compensation
Shares at a discount can be issued as part of employee stock ownership plans (ESOPs) or as sweat equity. This allows companies to compensate employees or directors in equity rather than cash, aligning their interests with the company’s long-term success.
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Encouraging Public Participation
For companies planning to go public or aiming to increase their shareholder base, issuing shares at a discount can make the shares more affordable and attract a larger number of investors. This can be particularly useful for companies entering new markets or industries.
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Overcoming Market Perception
Companies with a tarnished market image or those that have recently faced negative publicity may offer shares at a discount to restore investor confidence. This can help to overcome any reluctance from potential investors by offering an immediate financial incentive.
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Legal and Regulatory Approvals
In some jurisdictions, laws may allow companies to issue shares at a discount under specific circumstances, such as during a merger or acquisition. Companies take advantage of these legal provisions to facilitate complex transactions that require rapid capital mobilization.
When a Company can Issue Shares at a Discount?
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Sweat Equity Shares
Sweat equity shares are issued by a company to its directors or employees at a discount or for consideration other than cash, in recognition of their contribution to the company. Under Section 54 of the Companies Act, 2013, a company can issue sweat equity shares, provided that it has been incorporated for at least one year. The issue must be approved by a special resolution in a general meeting.
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Debts Converted into Equity
- Corporate Debt Restructuring (CDR): During a debt restructuring process, lenders may agree to convert a part of the company’s debt into equity. In such cases, shares may be issued at a discount to the lenders as part of the restructuring agreement.
- Insolvency and Bankruptcy Code (IBC): During the resolution process under the IBC, shares can be issued at a discount if it is part of the approved resolution plan by the National Company Law Tribunal (NCLT).
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Compliance with Court Orders
If a court or tribunal orders the issuance of shares at a discount as part of a legal or regulatory settlement, the company can comply with such orders. This might occur during mergers, amalgamations, or compromise arrangements sanctioned by the court.
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Forfeited Shares Reissued
When shares are forfeited due to non-payment of calls, they can be reissued at a discount, provided the discount does not exceed the amount that was unpaid on the shares at the time of forfeiture.
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Regulatory Approvals
The Central Government or regulatory authorities like the Securities and Exchange Board of India (SEBI) may grant permission to issue shares at a discount under specific circumstances. However, such approvals are rare and typically involve significant regulatory scrutiny.
Accounting Treatment for Shares Issued at Discount:
| Transaction | Account Debit | Account Credit | Amount |
| 1. Issue of Shares at Discount | Bank/Cash | Share Capital | Amount received |
| Discount on Issue of Shares (Discount Account) | Discount amount | ||
| 2. Record Discount on Issue of Shares | Discount on Issue of Shares (Discount Account) | Securities Premium Account (if applicable) | Discount amount |
| 3. Reissue of Forfeited Shares at Discount | Bank/Cash | Share Capital | Amount received |
| Discount on Issue of Shares (Discount Account) | Discount amount | ||
| 4. Adjusting Discount on Issue | Share Capital | Discount on Issue of Shares (Discount Account) | Amount adjusted |
| 5. If Shares are Issued Under Special Circumstances (e.g., Court Order) | Bank/Cash | Share Capital | Amount received |
| Discount on Issue of Shares (Discount Account) | Discount amount |
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