Page 271 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes 11.3.9 Employee Stock Option Scheme/Employee Stock Purchase Plan

‘Employee stock option’ means the option given to the whole-time directors, officers or
employees of a company which gives such directors, officers or employees the benefit or right
to purchase or subscribe at a future date, the securities offered by a company at a predetermined
price. SEBI issues guidelines regarding these schemes/plans.

11.3.10 Issue of Shares at Par, at Premium and at Discount

A company may issue shares at par, or at premium, or at a discount.
Issue at par. Shares are deemed to have been issued at par when subscribers are required to pay
only the amount equivalent to the nominal or face value of the shares issued. For instance, if the
face value of a share is ` 10 and the buyer is required to pay thereon ` 10 only – nothing more
nothing less – then he will be said to be holder of a share issued at par.
Issue at a premium. In the above example, if the buyer is required to pay more than the face
value of the share, e.g., ` 12.50 on a share of ` 10, then the share is said to be issued or sold at a
premium.
The Companies Act, 1956 does not stipulate any conditions or restrictions regarding the issue of
shares by a company at a premium. However, it does impose conditions regulating the utilisation
of the amount of premium collected on shares. Firstly, the premium cannot be treated as profit
and, therefore, cannot be distributed as dividend. Secondly, the amount of premium received in
cash and the equivalent of it received in kind must be kept in a separate bank account known as
the ‘Share Premium Account’. Thirdly, the amount of share premium is to be maintained with
the same sanctity as the share capital. Fourthly, the share premium account cannot be treated as
free reserves as it is in the nature of capital reserve. Fifthly, the amount credited to the ‘Share
Premium Account’ can be used only for the purposes listed in s.78(2).

In accordance with the provisions of s.78(2), the share premium can be utilised only for the
following purposes: (i) to pay for unissued shares of the company to be issued to members of the
company as fully paid bonus shares; (ii) to write off the preliminary expenses of the company;
(iii) to write off the expenses or the commission paid or discount allowed on, any issue of shares
or debentures of the company; (iv) to provide for the payment of premium payable on the
redemption of redeemable preference shares or of any debentures of the company.
The issue of shares at a premium does not require the sanction of any governmental agency. The
company is, however, required to ensure compliance of SEBI guidelines in this regard.
The Companies (Amendment) Act, 1999 amended s. 78 to the effect that for the word ‘share’ in
the section, the word ‘securities’ shall be substituted.
Issue at a discount. If the buyer of shares is required to pay less than the face value of the share,
e.g., ` 8.50 on a share of ` 10, then the share is said to be issued or sold at a discount. However,
the issue of shares at a discount is regulated by law and s.79 provides for certain conditions
subject to which shares can be issued at a discount. These conditions are:
1. The issue of shares at a discount is authorised by a resolution passed by the company in
general meeting and sanctioned by the Company Law Board.

2. The issue must be of a class of shares already issued.
3. The maximum rate of discount must not exceed 10 per cent or such higher rate as the
Central Government may permit in any special case.
4. Not less than one year has, at the date of issue, elapsed since the date on which the
company was entitled to commence business.

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