Issue of Shares, at Par, Premium, and Discount

Issue of shares is one of the most important methods by which a company raises its share capital. Shares represent the ownership interest of shareholders in a company, and the funds raised through issue of shares are used for starting a business, expansion, diversification, modernization, and meeting working capital requirements. The issue of shares plays a vital role in corporate financing and directly affects the capital structure, financial position, and ownership pattern of a company.

Under the Companies Act, 2013, shares can be issued in different ways depending upon the price at which they are offered. Broadly, shares may be issued at par, at premium, or at discount. Each method has its own meaning, features, legal provisions, advantages, and accounting treatment. A clear understanding of these methods is essential for students of corporate accounting.

Meaning of Shares

Share is a unit of ownership in the share capital of a company. It represents the shareholder’s proportionate interest in the company’s assets and profits. According to Section 2(84) of the Companies Act, 2013, a share means a share in the share capital of a company and includes stock.

Shares entitle their holders to certain rights such as the right to receive dividends, the right to vote, and the right to share surplus assets on liquidation.

Meaning of Issue of Shares

The issue of shares refers to the process by which a company offers its shares to the public, existing shareholders, or selected investors in order to raise capital. When a company issues shares, it invites applications from investors and, upon allotment, transfers ownership interest to them.

Shares may be issued:

• At face value (par)

• At a price higher than face value (premium)

• At a price lower than face value (discount – restricted)

1. Issue of Shares at Par

Issue of shares at par means issuing shares at a price equal to their face value or nominal value. In this case, the issue price of the share is exactly the same as the value printed on the share certificate.

For example, if a share of face value ₹10 is issued at ₹10, it is said to be issued at par.

Features of Issue of Shares at Par

One of the main features of shares issued at par is that there is no extra charge or concession involved. The investor pays exactly the nominal value of the share. This method is commonly adopted by newly established companies or companies that do not yet have a strong market reputation.

Issue at par reflects a neutral valuation of the company, where neither premium nor discount is justified. Accounting treatment is also simple because the entire amount received is credited directly to the Share Capital Account.

Reasons for Issuing Shares at Par

Companies may issue shares at par due to the following reasons:

• The company is newly formed and has no established goodwill

• Market conditions are uncertain

• The company wants to attract small investors

• The company does not want to complicate accounting procedures

• Face value reasonably represents the company’s worth

Accounting Treatment of Issue of Shares at Par

When shares are issued at par, the amount received from shareholders is fully credited to Share Capital Account. No additional account is required.

The accounting process involves:

• Receipt of application money

• Allotment of shares

• Receipt of allotment and call money

Since the shares are issued at face value, the total amount received equals the share capital created.

Advantages of Issue of Shares at Par

• Simple and transparent accounting

• Encourages investors due to affordable pricing

• Suitable for new and small companies

• No legal complications

• Easy valuation of shares

Limitations of Issue of Shares at Par

• Does not reflect market value for strong companies

• No additional reserves are created

• May undervalue a financially strong company

• Limited scope for capital strengthening

2. Issue of Shares at Premium

Issue of shares at premium means issuing shares at a price higher than their face value. The excess amount charged over the nominal value is known as premium.

For example, if a share of face value ₹10 is issued at ₹15, the premium is ₹5 per share.

Meaning of Securities Premium

The premium collected on issue of shares is credited to a special account called Securities Premium Account. It is a capital reserve and not a revenue profit. The Securities Premium Account represents the additional amount received by the company due to its reputation, profitability, or growth prospects.

Features of Issue of Shares at Premium

Issue of shares at premium is usually adopted by companies that have:

• High profitability

• Strong financial position

• Good market reputation

• Consistent dividend history

Premium indicates investor confidence and the perceived value of the company above its nominal capital.

Legal Provisions Related to Securities Premium

According to Section 52 of the Companies Act, 2013, the Securities Premium Account can be used only for specific purposes. These include:

• Issuing fully paid bonus shares

• Writing off preliminary expenses

• Writing off expenses or discount on issue of shares or debentures

• Providing premium payable on redemption of preference shares or debentures

• Buy-back of shares

The amount cannot be used for distribution of dividends.

Accounting Treatment of Issue of Shares at Premium

When shares are issued at premium, accounting treatment involves two parts:

• Face value credited to Share Capital Account

• Premium amount credited to Securities Premium Account

Premium may be received:

• With application money

• With allotment money

• With call money

In all cases, the premium amount is transferred to Securities Premium Account.

Advantages of Issue of Shares at Premium

• Strengthens financial position of the company

• Creates capital reserves without increasing liability

• Reflects true value of the company

• Enhances credibility and goodwill

• Helps meet future capital expenses

Limitations of Issue of Shares at Premium

• High issue price may discourage small investors

• Shares may become less liquid

• Requires strong financial performance

• Strict legal restrictions on utilization

3. Issue of Shares at Discount

Issue of shares at discount means issuing shares at a price lower than their face value. The difference between the face value and the issue price is known as discount.

For example, issuing a ₹10 share at ₹8 means a discount of ₹2 per share.

Legal Position Regarding Issue of Shares at Discount

Under the Companies Act, 2013, issue of shares at discount is generally prohibited. The law allows issue of shares at discount only in the case of sweat equity shares, subject to specified conditions.

Earlier laws permitted issue at discount with government approval, but to protect investor interests and prevent misuse, such practices have been restricted.

Issue of Sweat Equity Shares

Sweat equity shares are issued to employees or directors in recognition of their:

• Technical expertise

• Intellectual property contribution

• Value addition to the company

Such shares may be issued at a discount or for consideration other than cash, as permitted by law.

Reasons for Restricting Issue of Shares at Discount

• It represents a capital loss to the company

• It weakens the capital base

• It may mislead investors

• It can be misused to favor certain shareholders

• It affects fairness and transparency

Accounting Treatment of Discount on Issue of Shares

Discount on issue of shares is treated as a capital loss. If permitted, it is debited to Discount on Issue of Shares Account.

This discount is not written off immediately but is gradually written off against:

• Securities premium

• Capital profits

• General reserve

Discount appears on the asset side of the balance sheet until fully written off.

Disadvantages of Issue of Shares at Discount

• Reduces capital strength

• Creates negative market perception

• Indicates poor financial performance

• Affects shareholder confidence

• Restricted by law