Understanding the Process and Implications of Issuing Shares at Par

When a brand-new company decides to raise its first round of share capital, it usually keeps things simple: it prices each share exactly at its face value. This is what company law calls issuing shares at par, and it is one of the most fundamental concepts in the chapter on issue and allotment of shares. It sounds straightforward, but it comes wrapped in specific legal conditions, accounting treatments, and strategic reasoning that every commerce student should understand clearly.

What does “issue of shares at par” actually mean? 🔗

Every share has a nominal value or face value written in the company’s memorandum of association. This is the value stamped on the share certificate, commonly ₹10 or ₹1 per share in India. When a company sells that share to an investor for exactly this stated amount, with no addition and no reduction, the share is said to be issued at par.

For example, if a company’s memorandum lists the face value of an equity share as ₹10, and it collects exactly ₹10 from an applicant during allotment, the transaction is a par issue. There is no markup for goodwill or brand reputation, and no discount to make the offer more attractive. The cash the company receives matches the nominal value rupee for rupee.

The legal backbone: what the Companies Act says 🔗

The starting point is Section 43 of the Companies Act, 2013, which classifies share capital into equity share capital and preference share capital, and sets the stage for how shares can be priced when issued. The actual pricing choice, however, is governed more directly by Section 53, which deals with what a company cannot do rather than what it can.

Why the discount route is barred 🔗

Section 53 of the Companies Act generally prohibits a company from issuing shares at a price lower than face value. Any share allotted at a discount is treated as void, and the promoters or officers responsible can face penalties. The official text of the Companies Act carves out narrow exceptions, such as when a company issues shares to its creditors as part of a statutory debt restructuring or resolution plan approved by the appropriate authority. Outside these exceptions, a company effectively has only two legitimate pricing choices: at par, or at a premium above par. There is no legal route to sell a share below its stated nominal value in ordinary circumstances.

This restriction exists to protect the company’s creditors and shareholders. If shares could be sold cheaply, the company’s stated capital base would not reflect the actual money brought in, misleading anyone who relies on the balance sheet to judge financial strength.

Par, premium, and discount: how they compare 🔗

Students often confuse these three terms in exams. A quick side-by-side view makes the distinction easier to retain.

Why do companies choose to issue shares at par? 🔗

Issuing at par is most common among newly incorporated companies and closely held businesses that have not yet built a market reputation or a track record of profits. A few practical reasons drive this choice:

No established goodwill: A young company usually cannot justify asking investors to pay above face value, because there is no trading history or brand value to point to as evidence of extra worth.

Keeping the offer attractive: Charging exactly the face value removes any pricing debate and makes the offer easier for early investors, including founders’ friends and family or angel investors, to accept.

Book value stays predictable: Because the cash received equals the capital recorded, the company’s book value per share is not distorted by a premium reserve that has to be tracked and applied only for restricted purposes.

Simplicity in accounting: A par issue avoids the extra step of maintaining a separate Securities Premium Account, which under the Act can only be used for specific purposes such as issuing bonus shares or writing off preliminary expenses.

How the process works, step by step 🔗

Whether a company is issuing shares at par through a private placement or a public offer, the broad procedure follows a similar path.

1. Deciding the offer and inviting applications 🔗

The board decides the number of shares, the face value, and the mode of offer, whether it is a rights issue to existing shareholders, a private placement, or a public issue through a prospectus, as governed under Section 62 of the Companies Act, which sets out the order of preference for offering further shares.

2. Meeting the minimum subscription requirement 🔗

For a public issue, the company must ensure it receives valid applications for at least the minimum subscription amount, generally 90 percent of the issue size, before it can proceed with allotment under Section 39 of the Act. If this threshold is not met, the company must refund all application money within the prescribed time, failing which it becomes liable to pay interest to applicants.

3. Allotment and recording the transaction 🔗

Once shares are allotted, the company issues share certificates and records the transaction in its books. Since the issue is at par, the full amount received is credited to the Share Capital Account. A typical journal entry looks like this, following the standard treatment described in accounting guidance on share issue entries:

Bank Account Dr. ₹10 per share
To Share Capital Account ₹10 per share

No premium account is created because there is no excess amount collected. This is the cleanest possible entry among the three issue types, which is one reason it is often the first case taught before moving on to premium and discount issues.

Regulatory oversight for listed and larger companies 🔗

When a public company plans to list on a stock exchange, the pricing of its shares also falls under the SEBI (Issue of Capital and Disclosure Requirements) Regulations. SEBI does not fix the price a company can charge in a book-built public offer, but it does regulate disclosures, the process of price discovery, and the minimum subscription and allotment procedures that protect retail investors. For preferential allotments by listed companies, pricing is tied to a formula based on recent trading prices rather than left entirely to the board’s discretion, which is a layer of protection that does not apply to unlisted companies issuing purely at par to a small group of investors.

For private and unlisted companies, guidance from professional bodies such as the Institute of Company Secretaries of India highlights that certain categories of further issue, particularly preferential allotments to select investors, require a valuation report from a registered valuer to justify the issue price, even when that price ends up being at par.

What issuing at par means for the company and its shareholders 🔗

A par issue keeps the balance sheet arithmetic simple, but it is not free of implications. Because no premium is collected, the company cannot build a Securities Premium Reserve from this transaction, which limits the funds available later for uses like writing off share issue expenses or funding a bonus issue. For existing shareholders, a par issue to new investors can also raise fairness concerns if the company’s actual worth per share, based on its accumulated reserves and profits, is already higher than the face value. Selling new shares at the bare face value in that situation effectively transfers value from old shareholders to new ones, which is why compliance frameworks for share issuance increasingly emphasise valuation reports and shareholder approval before such allotments go through, particularly for preferential issues.

None of this makes issuing at par a poor choice. For a genuinely new company with no track record, pricing at par is often the most honest and practical option, and it keeps regulatory compliance relatively light compared to premium issues, which invite closer scrutiny of how the premium figure was justified.

What do you think? If a company with strong reserves and profits chose to issue fresh shares at par instead of at a fair premium, would that decision seem fair to its existing shareholders? And in the case of new start-ups, does keeping the issue price at bare face value help or limit their ability to raise adequate capital early on?

References

1. https://www.indiacode.nic.in/bitstream/123456789/2114/5/A2013-18.pdf
2. https://taxguru.in/company-law/issue-shares-companies-act2013-private-limited-companies.html
3. https://commercewithprachi.com/blog/issue-shares-par-premium-journal-entries/
4. https://www.sebi.gov.in/sebi_data/faqfiles/may-2025/1747290561386.pdf
5. https://www.icsi.edu/media/filer_public/b3/71/b3717ef6-fd15-4808-98b0-22c5417fd64b/issue_of_shares_pallavi_moonka.pdf
6. https://www.corporateprofessionals.com/articles/ultimate-guide-on-issue-of-shares/