issue of shares at a discount

Issue of shares at a discount is covered under section 53 of the companies act, 2013. A company cannot issue shares at a discount and any such issue shall be void. Subsequently vide the 2017 amendment, issue of shares at a discount was allowed for limited provisions of converting debt into shares pursuant to a statutory resolution plan or debt restructuring scheme in accordance with the guidelines of RBI. So basically the debt restricting scheme should be under the aegis of RBI. The statutory resolution plan can be under IBC also.

Now vide the 2018 Ordinance, contravention of this section has been made more stringent. Now where any company violates this section, the company and every officer who is in default shall be liable to a penalty which shall be equal to the amount raised through issue of shares at a discount of Rs.5 lakhs, whichever is LESS, AND the company shall also be liable to refund all the monies received with interest at the rate of 12% per annum to all the persons to whom the shares were issued.

The earlier provision was penalty of not less than Rs.1 lakh extending upto Rs.5 lakhs for the company and jail term for every officer which may extend to 6 months or with fine of not less than Rs.1 lakh but which could go upto Rs.5 lakhs or with both.

Now to end the confusion, the jail term has been removed for the officer in default but the penal fines has been increased considerably. 

Startup Regulatory Relaxations - Issue of shares

RBI has vide its notification dated 11/2/2016 made a couple of clarifications w.r.t. issue of shares in case of start ups. One of the points is issue of shares without cash payment through sweat equity or issue of shares in lieu of payments due which are permissible transactions under FEMA. 

Accordingly, the following is clarified:

a. Issue of shares without cash payment through sweat equity: Reserve Bank of India vide Notification No. FEMA.344/2015 RB dated June 11, 2015 has permitted Indian companies to issue sweat equity, subject to conditions, inter-alia, that the scheme has been drawn either in terms of regulations issued under the Securities Exchange Board of India Act, 1992 in respect of listed companies or the Companies (Share Capital and Debentures) Rules, 2014 notified by the Central Government under the Companies Act 2013 in respect of other companies.

b. Issue of shares against legitimate payment owed: Reserve Bank of India vide Notification No. FEMA.315/2014-RB dated July 10, 2014, has permitted Indian companies to issue equity shares against any other funds payable by the investee company (e.g. payments for use or acquisition of intellectual property rights, for import of goods, payment of dividends, interest payments, consultancy fees, etc.), remittance of which does not require prior permission of the Government of India or Reserve Bank of India under FEMA, 1999 subject to conditions relating to adherence to FDI policy including sectoral caps, pricing guidelines, etc. and applicable tax laws (cf. paragraph 3 of Schedule 1 to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2015).