Question

Which of the following statements is correct regarding the issue of Shares and Debentures at a discount?

• A. Shares may be issued at a discount, whereas debentures cannot be issued below their face value.
• B. Debentures may be issued at a discount, but shares cannot ordinarily be issued at a discount under the Companies Act.
• C. Both shares and debentures are prohibited from being issued at a discount.
• D. Both shares and debentures can freely be issued at a discount without any legal restrictions.

Hint:

To remember this:
• Shares = Equity. The law protects the value of ownership; therefore, No Discount (except Sweat Equity).
• Debentures = Debt. It's just a loan. Like any loan, you can negotiate the "entry price"; therefore, Discount Allowed.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
The Companies Act, 2013, governs how a company can raise capital through the issue of securities. There are strict legal distinctions between equity (shares) and debt (debentures) regarding their issue price.
Step 2: Detailed Explanation:
1. Rules for Shares (Section 53): As per the Companies Act, 2013, a company is generally prohibited from issuing shares at a discount. Any shares issued by a company at a discounted price shall be void.
{Exception:} The only major exception is the issue of "Sweat Equity Shares" under Section 54, which can be issued to employees or directors at a discount for their provide know-how or value additions.
2. Rules for Debentures: Unlike shares, there is no legal restriction in the Companies Act that prevents a company from issuing debentures at a discount. Since debentures are a form of loan (debt), companies often issue them at a discount to make the investment more attractive when the stated interest rate is lower than the market rate.
Step 3: Final Answer:
Shares cannot be issued at a discount (with minor exceptions), while debentures can be issued at a discount.