Sunday, May 11, 2014

Issue of Share at a Discount and at a Premium

Issue of share at a Premium
If Shares are issued at a price, which is more than the face value of shares, it is said that the shares have been issued at a premium. The Company Act 1956 does not place any restriction on issue of shares at a premium but the amount received, as premium has to be placed in a separate account called Securities Premium Account.

Under Section 78 of the Company Act 1956, the amount of security premium may be used only for the following purposes:
1.    To write off the preliminary expenses of the company.
2.    To write off the expenses, commission or discount allowed on issued of shares or debentures of the company.
3.    To provide for the premium payable on redemption of redeemable preference shares or debentures of the company.
4.    To issue fully paid bonus shares to the shareholders of the company.
5.    In purchasing its own shares (buy back).

Issue of shares at a discount

As a general rule, a company cannot ordinarily issue shares at a discount, except in case of ‘reissue of forfeited shares’ and in accordance with the provisions of Companies Act.

But according to Section 79 of company act 1956, a company is permitted to issue shares at discount provided the following conditions are satisfied: -
a.    The issue of shares at a discount is authorised by a resolution passed by the company in its general meeting and sanctioned by the Central Government.
b.   The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10 per cent of the nominal value of shares. The rate of discount can be more than 10 per cent if the Government is convinced that a higher rate is called for under special circumstances of a case.
c.    At least one year must have elapsed since the company was entitled to commence the business.
d.   The shares are of a class, which has already been issued.
e.   The shares are issued within two months from the date of sanction received from the Government.