The issue of shares at a discount is regulated by law and section 79 provides that subject to certain conditions, the shares can be issued at discount. The conditions are as follows:
- The issue must be a class or classes of shares already issued. The shares of the class issued for the first time are not allowed to be issued at a discount.
- Not less than 1 year, has at the date of issue, elapsed since the date for which the company became entitled to commence business.
- The issue of shares at a discount must have been authorized by a resolution passed by the company in general meeting and sanctioned by the Company Law Board/Central Government.
- Specification must be made in the resolution about the maximum rate of discount, at which the share are to be issued. By virtue of the provision added to section 79 by the amendment Act, 1974, no such resolution should be passed by Company Law Board, if the maximum rate of discount specified in the resolution exceeds 10% unless the Company Law Board is of the opinion that a higher percentage of discount may be allowed in the special circumstances of the case [section (ii)]
- After the date of the sanction, the shares to be issued at the discount must be issued within 2 months, the time period can be extended if Company Law Board permits.
- Each and every prospectus relating to the issue of the shares must have the particular of the discount allowed on the issue of the shares or so must of that discount as has not been written off at the date issue of the prospectus.
- On default the company and every officer of the company who is in default shall be punishable with a fine which may extend to Rs. 500.
Directors’ liability in respect of improper issue of shares at a discount:
- The directors will then be liable if they have improperly issued the shares at a discount. The extent of compensation will be to the amount of discount.
- The holders of such shares will have to pay back to the company the amount of discount.
- If before the commencement of winding up the allottee discovers the illegality of discount allowed, he may avoid liability to take the shares and may get his name removed as a shareholder provided he has not otherwise agreed to keep the shares.