Pricing the Issue

In one line

A company may sell its shares for more than their face value and must keep the excess in a separate account it can spend only in listed ways; it may not sell them for less than face value, save for sweat equity and for debt converted under an approved resolution plan.

In exam wording: under section 52(1) where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate premium shall be transferred to a "securities premium account", and the provisions relating to reduction of share capital apply as if it were paid-up share capital; and under section 53(1) a company shall not issue shares at a discount except as provided in section 54, any share so issued being void by s.53(2), with the exception in s.53(2A) for debt converted into shares under a statutory resolution plan or debt restructuring scheme.

Why the law has this at all

Both rules protect the same thing, the integrity of stated capital, but from opposite directions.

The discount prohibition exists because the nominal value of a share is a public statement of what each share has contributed to the company. A creditor reading the balance sheet takes the paid-up capital as a measure of what the members have put in. If shares could be issued at less than face value, the figure would overstate the fund, and the shareholder would enjoy limited liability on a contribution he never made. So the rule is not about fairness between investors; it is a creditor-protection rule, which is why the exception in s.53(2A) is available precisely where creditors themselves are converting their debt.

The premium account exists because the excess is not profit. A company that sells a ten rupee share for fifty has not earned forty rupees; it has received capital contribution beyond the nominal figure. If it could be distributed as dividend, the capital base would leak out to members. So s.52 impounds it and, by applying the reduction of capital provisions to it, treats it as though it were paid-up capital, with a short list of permitted uses.

Section 52: the securities premium account

52(1): where shares are issued at a premium, whether for cash or otherwise, a sum equal to the aggregate premium is transferred to a securities premium account, and the Act's provisions on reduction of share capital apply as if that account were paid-up share capital, except as the section provides.

52(2): the permitted uses. Notwithstanding sub-section (1), the account may be applied by the company:

(a) towards the issue of unissued shares to members as fully paid bonus shares; (b) in writing off the preliminary expenses of the company; (c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures; (d) in providing for the premium payable on the redemption of any redeemable preference shares or debentures; or (e) for the purchase of its own shares or other securities under section 68.