Question 4: (a) Can a company issue shares at a discount? If so, explain legal provisions relating to the issue of shares at a discount under section 79 of the companies Act.
Yes, shares of a company can be issued at a discount but subject to some conditions.
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 a discount. The requirements 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 period for which the company became entitled to commence business.
- The issue of shares at a discount must have been authorised by a resolution passed by the company in general meeting and sanctioned by the Company Law Board/Central Government.
- The specification must be made in the resolution about the maximum rate of discount, at which the share is 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 exceptional circumstances of the case [section (ii)]
- After the date of the sanction, the shares to be issued at a discount must be issued within 2 months; the 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.
(b) Describe various ways in which a company can redeem its debentures.
Debentures are invariably redeemable. The Companies Act has not laid down any conditions for the redemption of debentures. Of course, the terms laid down for the redemption of the debentures in the prospectus at the time of issue of the debentures will have to be complied with by the company.
(i) In one lot:
All the debentures may be redeemed in one lot at the end of a specified period of time or even before the expiry of the specified period of time by serving a notice to debenture-holders
(ii) In instalments by draw of lots:
The debentures may be redeemed in instalments. For example, one-tenth of the total debentures may be redeemed every year for ten years by draw of lots. The lot will have to be drawn every year to determine which particular debentures have to be redeemed for that specific year.
(iii) By purchase of debentures in the open market:
A company may reserve the right to buy its debentures in the open market. If the company cancels the debentures so purchased, it will amount to the redemption of these debentures.