# Shares Issued at Discount - Section 53

## General Prohibition

A company shall NOT issue shares at a discount, except sweat equity shares.

## Consequence of Violation

Any share issued by a company at a discounted price shall be VOID.

## Exception - Debt-to-Equity Conversion

A company may issue shares at a discount to its creditors when its debt is converted into shares pursuant to:

A statutory resolution plan, OR
A debt restructuring scheme in accordance with guidelines issued by RBI.

## Penalty for Non-Compliance

Where any company fails to comply with this section:

Company AND every officer in default shall be liable to penalty equal to:
Amount raised through issue of shares at discount, OR
Rs. 5 lakhs, whichever is less.
Additionally, company shall be liable to refund all monies received with interest at 12% p.a. from date of issue.

## Auditor's Verification Steps

Check movement in share capital during the year - wherever there is an issue.
Verify by reading minutes of meetings that the company has not issued any shares at discount.
Verify that if shares were issued at discount, it was only to creditors as part of debt restructuring as per RBI guidelines.

Worked example

### Example 1

Example - Void issue: ABC Ltd, having face value of shares Rs. 10, issued 1 lakh shares at Rs. 8 each (Rs. 2 discount). The issue is void. Auditor must qualify the audit report. Penalty: lower of Rs. 8 lakhs (amount raised) or Rs. 5 lakhs = Rs. 5 lakhs on both company and officers in default.

### Example 2

Example - Permitted discount issue: XYZ Ltd owes Rs. 100 crore to lenders. As part of RBI-approved debt restructuring, lenders agree to convert Rs. 50 crore debt into equity. Shares are issued at Rs. 7 (face value Rs. 10) representing fair value. This is permitted under Section 53(2A).

⚠️ Common exam mistakes

Confusing 'discount' with 'premium' - discount is selling below face value, premium is above
Forgetting that sweat equity shares (Section 54) are a separate exception, not covered by Section 53
Computing penalty as the higher of the two amounts instead of the LOWER (penalty = lower of amount raised or Rs. 5 lakh)
Not knowing that the 12% interest refund applies in addition to the monetary penalty

Bare-Act text Section 53 · Companies Act, 2013 · click to expand

Except as provided in section 54, a company shall not issue shares at a discount. Any share issued by a company at a discounted price shall be void. 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.

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