What is Issue of Shares at Discount?

S7-SA7-0312

Grade Level:

Class 12

AI/ML, Physics, Biotechnology, FinTech, EVs, Space Technology, Climate Science, Blockchain, Medicine, Engineering, Law, Economics

Definition

What is it?

Issue of shares at a discount means a company sells its shares to the public for a price lower than their face value (or nominal value). For example, if a share has a face value of ₹10, issuing it at ₹8 means it's issued at a discount of ₹2. This practice is generally prohibited by law in India, except for specific cases like 'sweat equity shares'.

Simple Example

Quick Example

Imagine your school canteen sells a ₹10 samosa for only ₹8 to its staff as a special benefit. Here, the ₹10 is the original price (face value) and ₹8 is the discounted price. Similarly, when a company sells a share with a ₹100 face value for ₹90, it's issuing shares at a discount.

Worked Example

Step-by-Step

Let's say a company, 'Tech Innovators Ltd.', wants to issue 1,000 sweat equity shares. The face value of each share is ₹50. The company decides to issue these shares at a discount of 10%. Let's calculate the issue price and the total discount amount.

1. Face Value per share = ₹50
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2. Discount percentage = 10%
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3. Discount amount per share = 10% of ₹50 = (10/100) * ₹50 = ₹5
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4. Issue price per share = Face Value - Discount amount = ₹50 - ₹5 = ₹45
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5. Total number of shares to be issued = 1,000 shares
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6. Total amount received by the company = 1,000 shares * ₹45/share = ₹45,000
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7. Total discount given by the company = 1,000 shares * ₹5/share = ₹5,000

Answer: The issue price per share is ₹45, and the total discount given is ₹5,000.

Why It Matters

Understanding share issues is key for anyone interested in FinTech, Economics, or even launching their own startup. Knowing about discounts helps you understand how companies raise money and value themselves, which is crucial for careers in investment banking, financial analysis, or even managing your own business.

Common Mistakes

MISTAKE: Confusing 'issue at discount' with 'issue at premium'. | CORRECTION: Discount means selling below face value, while premium means selling above face value. They are opposite concepts.

MISTAKE: Assuming all companies can issue shares at a discount. | CORRECTION: In India, issuing shares at a discount is generally prohibited by the Companies Act, 2013, except for 'sweat equity shares' or as allowed by special tribunals.

MISTAKE: Calculating discount percentage on the issue price instead of face value. | CORRECTION: The discount is always calculated on the face value (nominal value) of the share, not the price at which it's eventually sold.

Practice Questions

Try It Yourself

QUESTION: A share has a face value of ₹200. If it is issued at a 5% discount, what is the issue price per share? | ANSWER: ₹190

QUESTION: 'Bharat Motors Ltd.' issues 500 sweat equity shares. The face value is ₹100 per share. If the company receives ₹45,000 in total from this issue, what was the discount percentage per share? | ANSWER: 10%

QUESTION: 'Star Innovations Pvt. Ltd.' has a share with a face value of ₹75. They decide to issue 1,000 sweat equity shares at a price that results in a total discount of ₹15,000. Calculate the issue price per share and the discount percentage. | ANSWER: Issue price per share = ₹60; Discount percentage = 20%

MCQ

Quick Quiz

Which of the following is generally allowed to be issued at a discount in India?

Equity shares to the general public

Preference shares to existing shareholders

Sweat equity shares to employees/directors

Debentures to financial institutions

The Correct Answer Is:

The Companies Act, 2013, generally prohibits issuing shares at a discount, except for sweat equity shares, which are issued to employees or directors for their expertise or intellectual property.

Real World Connection

In the Real World

While regular shares cannot be issued at a discount to the public, companies in India sometimes issue 'sweat equity shares' to their employees or directors at a discount. This is a way to reward them for their hard work or special skills. For example, a startup like 'Zomato' might have offered sweat equity to its early employees as a part of their compensation, motivating them to build the company.

Key Vocabulary

Key Terms

FACE VALUE: The nominal or original value of a share printed on the share certificate. | ISSUE PRICE: The price at which a company offers its shares to the public. | DISCOUNT: The amount by which the issue price is less than the face value. | SWEAT EQUITY SHARES: Shares issued by a company to its directors or employees at a discount or for consideration other than cash, for their expertise or value addition.

What's Next

What to Learn Next

Great job learning about shares at a discount! Next, you should explore 'Issue of Shares at Premium'. This will show you how companies often raise even more money than the face value, which is a much more common scenario in the stock market and crucial for understanding company valuations.