Can we issue shares below face value?

You are setting up a company. Maybe an early investor says, "Your shares have a face value of ₹10, but we will only pay ₹4 each. It is a risky startup." Or a friend joins and you want to give shares for a token amount. The question is simple. Can a company issue shares for less than their face value?

The short answer: no. This is one of the plainest rules in company law, and the cost of getting it wrong is high. This article explains the rule, the narrow exceptions, and how to get the same commercial result lawfully.

What "face value" means

Face value (also called nominal value or par value) is the stated amount of the share. If your company has shares of ₹10 each, that is the face value.

Issuing at a discount means taking less than that amount for the share. A ₹10 share issued for ₹7 is issued at a discount of ₹3.

Issuing at a premium is the opposite. A ₹10 share issued for ₹50 carries a premium of ₹40. That is lawful and very common.

The rule

Section 53 of the Companies Act 2013 is titled "Prohibition on issue of shares at discount". It has two key lines.

• "Except as provided in section 54, a company shall not issue shares at a discount." (s.53(1), Companies Act 2013)
• "Any share issued by a company at a discount shall be void." (s.53(2), Companies Act 2013)

Read the second line again. The share is void. So any cap table entry, share certificate or investor money tied to that issue rests on a void share.

The penalty

If a company breaks this rule, section 53(3) of the Companies Act 2013 applies. Both the company and every officer in default are liable to a penalty. The penalty "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" (s.53(3), Companies Act 2013).

So the ceiling is the lower of two numbers. One is the amount raised through the discounted issue. The other is ₹5 lakh. If you raised ₹2 lakh through discounted shares, the ceiling is ₹2 lakh. If you raised ₹20 lakh, the ceiling is ₹5 lakh.

The penalty is not the whole cost. The same sub-section adds that "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" (s.53(3), Companies Act 2013).

That means two things at once. The company pays a penalty. And the company must give the money back, with 12% a year interest running from the day the shares were issued. The longer the mistake sits, the larger the refund.

Section 53(3) was substituted by Act 22 of 2019 with effect from 2 November 2018. The wording above is that amended text.

The exceptions

The ban has a small number of exits. Do not stretch them.

1. Sweat equity shares (s.54)

Section 54(1) of the Companies Act 2013 starts with the words "Notwithstanding anything contained in section 53". It lets a company issue sweat equity shares. These are shares given to directors or employees for their know-how, intellectual property or value addition, instead of cash.

Section 54 sets conditions. The main ones are these.

• The shares must be "of a class of shares already issued" (s.54(1), Companies Act 2013). A sweat equity share is not a new type of share. It sits in an existing class.
• The issue must be "authorised by a special resolution passed by the company" (s.54(1)(a), Companies Act 2013). A resolution is a special resolution when the notice said it was proposed as one and the votes cast in favour are not less than three times the votes cast against it (s.114(2), Companies Act 2013).
• The resolution must state "the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees" who will receive them (s.54(1)(b), Companies Act 2013).
• If the company's equity shares are listed on a recognised stock exchange, the issue must follow the SEBI regulations. If they are not listed, the issue must follow the prescribed rules (s.54(1)(d), Companies Act 2013).
• Sweat equity shares carry the same rights as equity shares and rank equally with other equity shareholders (s.54(2), Companies Act 2013).

The prescribed rules are in rule 8 of the Companies (Share Capital and Debentures) Rules, 2014. For a company other than a listed company that is not required to follow the SEBI sweat equity regulations, they include these points.

• The company shall not issue sweat equity to its directors or employees at a discount or for non-cash consideration, for their know-how, rights in the nature of intellectual property rights or value additions, unless a special resolution passed in general meeting authorises the issue (rule 8(1), Companies (Share Capital and Debentures) Rules 2014).
• The notice of that general meeting carries an explanatory statement with the particulars rule 8(2) lists, and a gist of the valuation report goes to shareholders with it (rule 8(2) and (8), Companies (Share Capital and Debentures) Rules 2014).
• Sweat equity issued in a year cannot exceed 15% of the existing paid-up equity share capital, or shares of issue value ₹5 crore, whichever is higher. The total sweat equity in the company cannot exceed 25% of paid-up equity capital at any time (rule 8(4) and first proviso, Companies (Share Capital and Debentures) Rules 2014).
• A startup, as defined in the notification the rule refers to, may issue up to 50% of its paid-up capital as sweat equity for up to ten years from incorporation or registration (rule 8(4), second proviso, Companies (Share Capital and Debentures) Rules 2014, as amended by the Amendment Rules 2020, G.S.R. 372(E) of 5 June 2020). That amendment changed "five years" to "ten years" and updated the startup notification the proviso refers to.
• The shares are locked in and cannot be transferred for three years from allotment (rule 8(5), Companies (Share Capital and Debentures) Rules 2014).
• A registered valuer must fix the fair price and give a justified report (rule 8(6) and (7), Companies (Share Capital and Debentures) Rules 2014).

Sweat equity is for directors and employees who bring know-how. It is not a route to sell cheap shares to outside investors or friends.

2. Debt converted into shares under a restructuring (s.53(2A))

Section 53(2A) of the Companies Act 2013 says that, despite the ban, "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". The scheme must follow guidelines, directions or regulations of the Reserve Bank of India under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.

This is narrow. It covers lenders under a statutory resolution plan or a debt restructuring scheme that fits the RBI framework. A loan from a founder or an angel investor that you both agree to convert into shares does not, on the words of the section, fit: a private agreement of that kind is neither a statutory resolution plan nor an RBI-framework debt restructuring scheme.

What you can do instead

Most founders who ask this question want one of two things. They want investors to pay less per share, or they want to reward people who join early. Both have lawful routes.

Set the face value low

If your shares have a low face value such as ₹1 or ₹10, an investor's price can sit at or above face value and the discount ban is not triggered. Settle the face value before you take money. For an existing company, take professional advice.

Issue at face value, and price a premium by agreement

An investor paying more than face value is lawful. When a company issues shares at a premium, "a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a 'securities premium account'" (s.52(1), Companies Act 2013).

So if you issue a ₹10 share for ₹50, ₹10 is share capital and ₹40 goes to the securities premium account.

That account is not free cash. The Act treats it like paid-up share capital for reduction rules, "except as provided in this section" (s.52(1), Companies Act 2013). It may be used for limited purposes listed in s.52(2), including these.

• Fully paid bonus shares to members
• Writing off preliminary expenses
• Writing off the expenses of, or commission paid or discount allowed on, any issue of shares or debentures
• Providing for premium on redemption of redeemable preference shares or debentures
• Buying back the company's own shares or other securities under section 68

The deadline clock

Section 53 gives no period in which to fix a discounted issue. A share issued at a discount is void (s.53(2), Companies Act 2013). The 12% interest runs "from the date of issue of such shares" (s.53(3), Companies Act 2013). So the clock starts on the day of allotment, and every day adds to the refund bill.

For sweat equity, the special resolution is valid for allotment for twelve months from the date it is passed (rule 8(3), Companies (Share Capital and Debentures) Rules 2014).

Step by step: checking an issue before you allot

• Check the face value of the share.
• Check the price you are charging per share. If it is below face value, stop.
• If the receiver is a director or employee giving know-how, IP or value addition, check whether sweat equity under s.54 fits. If it does, pass a special resolution with the details s.54(1)(b) asks for.
• If the receiver is an outside investor, set the price at face value or above. Record any premium in the securities premium account (s.52(1), Companies Act 2013).
• Keep the board minutes, the resolutions and the valuer's report on file.

What not to do

• Do not call a cheap issue "sweat equity" when the person is a financial investor, not a director or employee giving know-how.
• Do not skip the special resolution or the valuer's report for sweat equity.
• Do not assume a founder loan converted into shares at a discount is covered by s.53(2A). It covers statutory resolution plans and RBI-framework debt restructuring.
• Do not let a discounted issue sit. The refund carries 12% interest a year from the date of issue (s.53(3), Companies Act 2013).

What to do now

Have a CA review your facts before you act or file.

FAQs

Can a company issue shares below face value to a founder or director?
Only as sweat equity, for know-how, intellectual property or value addition, under s.54 of the Companies Act 2013 and rule 8 of the Companies (Share Capital and Debentures) Rules 2014. It needs a special resolution, a registered valuer's report and the other steps above. An ordinary discounted issue is void (s.53(2), Companies Act 2013).

What if we have already issued shares at a discount?
The shares are void (s.53(2), Companies Act 2013). The company faces a penalty and a refund with 12% a year interest (s.53(3), Companies Act 2013). Speak to a CA or company secretary at once about how to put the capital right.

Is issuing shares at a premium allowed?
Yes. The premium goes to the securities premium account (s.52(1), Companies Act 2013). The account can be used only for the purposes the Act lists (s.52(2), Companies Act 2013).

Does the ₹5 lakh figure apply per share or in total?
The text says the penalty may extend to the amount raised through the discounted issue or ₹5 lakh, whichever is less (s.53(3), Companies Act 2013). It is not worded per share. Take advice on your own facts.

Can a lender convert a loan into shares at a discount?
Only in the narrow case in s.53(2A) of the Companies Act 2013. That is a statutory resolution plan or a debt restructuring scheme under Reserve Bank of India guidelines, directions or regulations. An ordinary loan conversion between a founder and the company does not qualify.

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See Also

• Sweat equity shares: issuing shares for know-how instead of cash (s.54)
• Buying back your own shares (s.68): the 25% ceiling, the board-vs-members route, and the solvency paper trail
• Converting our LLP into a private limited company