Issue of Shares at a Discount, Issue of shares at a premium, Auditor's Duties

Issue of Shares at a Discount
Issue of shares at a premium
Auditor's Duties

Issue of shares at Premium:

If Shares are issued at a price, which is more than the face value of shares, it is said that the shares have been issued at a premium. The Company Act, 2013 does not place any restriction on issue of shares at a premium but the amount received, as premium has to be placed in a separate account called Securities Premium Account.

Under Section 52 of the Company Act 2013, the amount of security premium may be used only for the following purposes:

a)      To write off the preliminary expenses of the company.

b)      To write off the expenses, commission or discount allowed on issued of shares or debentures of the company.

c)       To provide for the premium payable on redemption of redeemable preference shares or debentures of the company.

d)      To issue fully paid bonus shares to the shareholders of the company.

e)      In purchasing its own shares (buy back).

Auditor’s Duties regarding Issue of Shares at a Premium

1.          He must examine the Prospectus, Articles and the Directors’ Resolution in the Minute Book to verify that this is not only permissible but properly authorized also.

2.          He should vouch the amount of premium received and its transference to the securities premium reserve Account.

3.          He should see that this amount has been utilized only for the purposes mentioned in Sec. 78. He cannot object if the utilization is within law. If the premium is used for an unauthorized use, this amounts to reduction of capital.

4.          He should see that this amount has not been credited to profit and loss account but shown as “Reserves and Surplus” on the liabilities side of the Balance Sheet.

5.          He should note that provisions regarding reduction of share capital apply to securities premium reserve account as well.

Issue of shares at discount:

As per sec. 53 of the Companies Act, 2013, issue of shares at a discount is prohibited. This prohibition applies to all companies, public or private. Any issue of share at a discount shall be void. But a company can issue sweat equity shares to its directors or employees as a reward to them for their contributions. Sweat equity shares are those which are issued by a company at a discount or for consideration other than cash.

According to Section 54 of company act 2013, a company is permitted to issue sweat equity shares provided the following conditions are satisfied:

a)      The issue of shares at a discount is authorised by a resolution passed by the company in its general meeting and sanctioned by the Central Government.

b)      The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10 per cent of the nominal value of shares. The rate of discount can be more than 10 per cent if the Government is convinced that a higher rate is called for under special circumstances of a case.

c)       At least one year must have elapsed since the company was entitled to commence the business.

d)      The shares are of a class, which has already been issued.

e)      The shares are issued within two months from the date of sanction received from the Government.

Auditor’s Duties regarding Issue of Shares at a Discount

The auditor must examine compliance with requirements under Sec. 54 and its presentation and disclosure in the Balance Sheet. The auditor must ensure that discount is allowed only in case of sweat equity shares. The auditor must see that at least one year must have been elapsed since the company was entitled to commence the business and rate of discount must not exceed 10%.


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