Q.State clearly the conditions under which a company can issue shares at a discount.

Conditions for Issuing Shares at a Discount

A company can issue shares at a discount (i.e., at a price lower than their face value) only under the following strict conditions laid down by the Companies Act:

1. Type of shares: Only equity shares can be issued at a discount. Preference shares cannot be issued at a discount.

2. Authority: The issue must be authorised by a resolution passed in the general meeting of the company and sanctioned by the Central Government (now, the Registrar of Companies / Tribunal under the Act).

3. Minimum period: The company must have been in existence for at least one year from the date on which it was entitled to commence business.

4. Maximum discount: The discount rate cannot exceed 10% of the face value of the shares, unless the Central Government permits a higher rate in special circumstances.

5. Time limit: The shares must be issued within two months from the date of sanction (or within such extended time as the government may allow).

6. Disclosure: The prospectus or the offer document must clearly state the rate of discount and the reason for issuing shares at a discount.

Concept and Accounting Treatment

The issuance of shares at a discount means the company receives less than the face value (par value) from the shareholder. For example, a ₹100 share issued at ₹90 means the shareholder pays ₹90, and the ₹10 difference is the discount.

Why is this restricted? The share capital of a company is a fund that protects creditors. If shares are issued at a deep discount, the company's capital base is eroded, putting creditors at risk. Therefore, the Companies Act, 2013, strictly regulates discount issues.

The accounting treatment follows the principle that the discount is a capital loss — it reduces the company's net worth. The entry is:

• Debit Bank Account with the amount received (₹90 per share)
• Debit Discount on Issue of Shares Account with the discount amount (₹10 per share)
• Credit Share Capital Account with the face value (₹100 per share)

The Discount on Issue of Shares Account is a fictitious asset (a debit balance representing a loss) and is written off over a period of time, typically against the Securities Premium Reserve or retained earnings.

Conditions for Issue of Shares at a Discount (Section 53 of the Companies Act, 2013)

The conditions are cumulative — all must be satisfied:

1. The shares must be of a class already issued. You cannot issue a new class of shares at a discount. For example, if the company has only issued equity shares, it can issue further equity shares at a discount, but not preference shares at a discount unless preference shares were already in issue.

2. The issue must be authorised by a special resolution passed at a general meeting of the shareholders. An ordinary resolution is insufficient.

3. The rate of discount must be approved by the Tribunal (formerly the Company Law Board/Central Government). The discount cannot exceed 10% of the face value unless the Tribunal permits a higher rate in special circumstances.

4. The company must have been in business for at least one year from the date of commencement of business. A newly formed company cannot issue shares at a discount.

5. The shares must be issued within two months of the date on which the Tribunal's order is obtained (or within such extended time as the Tribunal may allow).

Journal Entry for Issue of Shares at a Discount

Assume a company issues 10,000 equity shares of ₹100 each at a discount of 10% (i.e., at ₹90 per share). The amount is fully called and paid.

Ledger Accounts

Share Capital Account

Discount on Issue of Shares Account

Bank Account

Working Notes

1. Calculation of Discount Amount

• Face value per share: ₹100
• Discount rate: 10%
• Discount per share: 10% of ₹100 = ₹10
• Number of shares: 10,000
• Total discount: 10,000 × ₹10 = ₹1,00,000

2. Calculation of Amount Received

• Issue price per share: ₹100 – ₹10 = ₹90
• Total amount received: 10,000 × ₹90 = ₹9,00,000

3. Verification of Conditions

• Condition 1: Shares of same class (equity) already issued? Yes (assumed).
• Condition 2: Special resolution passed? Yes (assumed).
• Condition 3: Discount ≤ 10%? Yes (10% exactly).
• Condition 4: Company in business ≥ 1 year? Yes (assumed).
• Condition 5: Issue within 2 months of Tribunal order? Yes (assumed). …