Prohibition on Issue of Shares at Discount (Section 53)
# Prohibition on Issue of Shares at Discount — Section 53
## Meaning of Discount
When the issue price is lower than the face value of the shares, the issue is termed as issued at discount, and the differential amount is the discount.
## General Rule — Prohibition
A company is prohibited from issuing shares at a discount. Any such issue is void.
2. Issue to Creditors via Debt Conversion — A company may issue shares at a discount to its creditors when their debt is converted into shares as a result of:
(a) Statutory Resolution Plan, or
(b) Debt Restructuring Scheme
This must be in accordance with guidelines/directions/regulations specified by the Reserve Bank of India under the RBI Act, 1934 or the Banking (Regulation) Act, 1949.
## Penalty for Contravention [Sub-section 3]
Liable Party
Penalty
Company
Refund all monies received with interest at 12% p.a. from the date of issue of such shares
Every officer in default
Upto an amount equal to the amount raised through the issue at discount, or ₹5 lakh, whichever is less
Worked example
### Example 1
Example (Penalty computation): PQR Ltd unlawfully issues shares at discount and raises ₹3,00,000. The penalty on every officer in default = lower of:
Amount raised: ₹3,00,000
Statutory ceiling: ₹5,00,000
→ Penalty = ₹3,00,000 (lower)
The company must refund ₹3,00,000 + 12% p.a. interest from the date of issue.
### Example 2
Example (Permitted discount): A consortium of banks holds a loan of ₹100 crore in MNO Ltd. Under a debt restructuring scheme approved per RBI guidelines, the debt is converted into equity shares. MNO Ltd may issue these shares at a discount even though face value is higher — this is a valid exception under Section 53.
⚠️ Common exam mistakes
Confusing 'discount' with 'commission/brokerage' — paying underwriting commission is allowed and is NOT discount.
Believing all discounted issues are absolutely banned — forgetting the sweat equity and debt-conversion exceptions.
Applying the penalty cap (₹5 lakh) without comparing to amount raised — the penalty is the LOWER of the two.
Forgetting the company itself must refund with 12% interest, in addition to officer-level penalty.
Bare-Act text Section 53 · Companies Act, 2013 · click to expand
Section 53(1): Except as provided in section 54, a company shall not issue shares at a discount. (2) Any share issued by a company at a discounted price shall be void. (2A) Notwithstanding anything contained in sub-sections (1) and (2), a company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the Reserve Bank of India under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949. (3) Where any company fails to comply with the provisions of this section, such company and every officer who is in default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at a discount or five lakh rupees, whichever is less, and the company shall also be liable to refund all monies received with interest at the rate of twelve per cent. per annum from the date of issue of such shares to the persons to whom such shares have been issued.