A company shall not issue shares at a discount (i.e., below face value).
Any share issued at a discounted price is void (invalid in law).
### Exceptions
Exception
Conditions
Sweat Equity Shares (Section 54)
Issued to employees/directors as per Section 54
Debt Conversion
Shares issued to creditors converting debt → equity under a statutory resolution plan or debt restructuring scheme, in accordance with RBI guidelines under RBI Act, 1934 or Banking (Regulation) Act, 1949
### Consequences of Violation
Consequence
Details
Penalty (Company + Officers in default)
Lower of: amount raised through discounted issue OR ₹5 lakhs
Refund obligation
Refund all money received + 12% p.a. interest from the date of issue
> The penalty cap is ₹5 lakhs — so even if crores were raised, the monetary penalty is capped at ₹5 lakhs. However, the full refund obligation remains.
Worked example
### Example 1
PQ & Co. – PYP May 2024
Face value: ₹100 | Proposed issue price: ₹95 (discount of ₹5 per share)
Purpose: Raise money from the general public for business diversification
Analysis:
This is a plain public issue — not sweat equity, not debt conversion → both exceptions are inapplicable
Under Section 53(1): Prohibited
Under Section 53(2): Any shares so issued would be void
If the company proceeds despite objection and raises ₹2 crores:
Penalty = lower of ₹2 crores and ₹5 lakhs = ₹5 lakhs (on company and defaulting officers)
Refund = ₹2 crores + 12% p.a. interest from the date of issue to all shareholders
The statutory auditor's objection is legally correct.
⚠️ Common exam mistakes
Thinking all shares can be issued at a discount — the prohibition is the default rule, exceptions are narrow
Forgetting that shares issued at a discount are VOID, not just penalized — they have no legal existence
Taking the HIGHER of amount raised or ₹5 lakhs for penalty — the penalty is the LOWER of the two
Overlooking the 12% interest refund obligation — it exists alongside (not instead of) the monetary penalty
Missing that sweat equity under Section 54 and RBI-directed debt conversion are the only two exceptions
Bare-Act text Section 53 · Companies Act, 2013 · click to expand
(1) A company shall not issue shares at a discount, except in the case of an issue of sweat equity shares given under Section 54 of the Companies Act, 2013. (2) 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 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.
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