When a company needs fresh capital, it doesn’t always get to sell shares or debentures at their full sticker price. Sometimes, to attract investors quickly, it sells them for less than their face value. This shortfall is called a discount on issue, and how a company accounts for it says a lot about the health of its books. Let’s break down what this discount really means, whether it’s even legal today, and how it eventually finds its way into the balance sheet.
Table of Contents
- What does “discount on issue” actually mean?
- Can a company still issue shares at a discount?
- Debentures don’t face the same restriction
- Why is the discount written off over several years?
- Fixed instalment method
- Reducing (fluctuating) instalment method
- Which account absorbs the discount?
- Where does the unwritten-off balance sit in the balance sheet?
- Putting it together with a worked example
- Why getting this treatment right matters
What does “discount on issue” actually mean?
Every share or debenture has a face value (also called nominal or par value) printed on the certificate. When a company issues it below this face value, the shortfall between the face value and the issue price is the discount on issue. For example, if a debenture with a face value of โน100 is issued at โน95, the โน5 gap is the discount.
This discount is not treated like an ordinary business expense such as rent or salary. It’s classified as a capital loss, because it arises from a capital-raising transaction, not from day-to-day operations. Since the funds raised through shares or debentures benefit the company over several years, accounting rules require that this loss be matched against the years it benefits, rather than dumped entirely into the year of issue.
Can a company still issue shares at a discount?
This is where many students trip up, because older textbooks still discuss discount on shares as a routine practice. Under the current law, it largely isn’t. Section 53 of the Companies Act, 2013 clearly prohibits companies from issuing shares at a discount, and any shares issued in violation of this rule are void.
There are only narrow exceptions. A company can issue shares at a discount to its creditors when converting debt into equity under a statutory resolution plan or an RBI-approved debt restructuring scheme. Separately, sweat equity shares can be issued at a discount to employees or directors under Section 54, subject to board and shareholder approval. Outside these situations, discounted share issues attract penalties for both the company and the officers responsible, along with a requirement to refund the money collected, with 12% interest.
So while the concept of “discount on issue of shares” is still relevant for understanding older transactions, historical exam problems, and these specific legal exceptions, it is no longer a routine fundraising tool for Indian companies.
Debentures don’t face the same restriction
Debentures are a different matter entirely. Since they represent borrowed money rather than ownership capital, the Companies Act does not prohibit issuing them at a discount. A company is free to offer debentures below face value to make them more attractive to investors, especially when interest rates or market conditions make a full-price issue unappealing.
Say a company issues 1,00,000 debentures of โน100 each at a 5% discount. The discount per debenture works out to โน5, and the total discount on the issue comes to โน5,00,000. This amount doesn’t vanish; it becomes an asset-side entry that gets written off gradually.
Why is the discount written off over several years?
The logic follows the matching principle of accounting. A company enjoys the use of borrowed funds for the entire tenure of the debentures, so it makes sense to spread the associated cost, including the discount, across that period rather than charging it all in year one. Guidance from the Institute of Chartered Accountants of India treats this discount as a form of interest cost, and it is typically amortised over three to five years, or over the life of the debentures if that period is shorter.
Interestingly, Accounting Standard 26 on Intangible Assets specifically excludes discount on issue of debentures from its scope, since it is really a borrowing cost rather than an intangible asset. This is why the amortisation approach, rather than intangible-asset treatment, continues to apply.
Fixed instalment method
When debentures are redeemed in one lump sum at the end of their tenure, the total discount is simply divided equally across the years. If โน5,00,000 is to be written off over five years, โน1,00,000 is charged to the Statement of Profit and Loss each year.
Reducing (fluctuating) instalment method
When debentures are redeemed in instalments, for example, through annual drawings, it wouldn’t be fair to write off the discount equally each year, because fewer debentures remain outstanding as redemption progresses. Instead, the discount is written off in proportion to the debentures still outstanding at the end of each year. This means the amount charged reduces year after year, which is why this is also called the reducing instalment method.
| Year | Debentures outstanding | Ratio | Discount written off (on โน30,000 total) |
|---|---|---|---|
| 1 | 6,00,000 | 6/20 | 9,000 |
| 2 | 5,00,000 | 5/20 | 7,500 |
| 3 | 4,00,000 | 4/20 | 6,000 |
| 4 | 3,00,000 | 3/20 | 4,500 |
| 5 | 2,00,000 | 2/20 | 3,000 |
Which account absorbs the discount?
Before charging the discount to the Profit and Loss Account, companies generally use a specific order of preference. The discount is first adjusted against the balance in the Securities Premium Account, since Section 52 of the Companies Act permits using securities premium for writing off such discounts. If the premium balance is insufficient, the remaining discount is set off against the Capital Reserve. Only when both these capital-profit sources fall short does the balance get charged to the Statement of Profit and Loss as a revenue charge.
This layered approach protects reported profits from capital losses as far as possible, while still ensuring the discount is fully accounted for within a reasonable period.
Where does the unwritten-off balance sit in the balance sheet?
Here’s a point worth clarifying carefully, since many notes still use outdated language. Under the old Schedule VI (applicable before the Companies Act, 2013), unwritten-off discount and similar deferred items were clubbed under a head called “Miscellaneous Expenditure and Losses.” That heading no longer exists in the current format.
Under Schedule III of the Companies Act, 2013, which governs how present-day balance sheets are prepared, the unamortised discount is split based on timing. The portion expected to be written off within the next 12 months is shown under Current Assets, specifically under “Other Current Assets.” The remaining portion, to be written off after 12 months, appears under Non-Current Assets, under “Other Non-Current Assets.”
So, if a company still has โน18,000 of a debenture discount left to amortise, with โน6,000 due to be written off in the coming year and โน12,000 after that, the balance sheet would show โน6,000 under “Other Current Assets” and โน12,000 under “Other Non-Current Assets,” rather than under any single “Miscellaneous Expenditure” line as in the older format.
Putting it together with a worked example
Consider a company that issues 6,00,000 worth of 10% debentures at a 5% discount, redeemable in five equal annual instalments of โน2,00,000 each. The total discount works out to โน30,000. Using the fixed instalment method over five years, โน6,000 is charged to the Statement of Profit and Loss each year. At the end of Year 1, โน6,000 due for write-off next year sits under Other Current Assets, and the remaining โน18,000 sits under Other Non-Current Assets. This continues, shrinking each year, until the entire discount is fully written off by the end of Year 5, coinciding with the final redemption instalment.
Why getting this treatment right matters
This might look like a technical bookkeeping detail, but it has real consequences. Correctly amortising the discount prevents a company from either overstating profits in the year of issue by ignoring the loss, or understating them by writing off the entire amount immediately. It keeps the balance sheet honest about how much capital loss is still pending recognition, which matters to investors, lenders, and auditors assessing the company’s actual financial position. It also keeps the company compliant with Schedule III disclosure norms and the accounting guidance issued by ICAI, avoiding scrutiny during audits or regulatory reviews.
For B.Com students, this topic is also a good reminder that accounting rules evolve alongside company law. What was standard practice for shares under the Companies Act, 1956, is now largely restricted under the 2013 Act, while the treatment for debentures has stayed fairly consistent, just with updated balance sheet formats.
What do you think? If a company today still has an old, partly written-off discount on shares from before Section 53 came into force, how should it continue accounting for that legacy balance? And does restricting discounted share issues, while still permitting discounted debentures, strike the right balance between investor protection and a company’s flexibility to raise funds?
References
- https://www.mca.gov.in/content/dam/mca/pdf/CompaniesAct2013.pdf
- https://shop.igpinstitute.org/insight/wp-content/uploads/2024/12/Unit-3-Issue-of-Debentures.pdf
- https://commerceschool.in/treatment-of-discount-loss-on-issue-of-debentures-in-cash-flow-statement/
- https://resource.cdn.icai.org/56994bos46206cp5annex.pdf
- https://www.shaalaa.com/question-bank-solutions/how-discount-issue-debentures-treated-books-accounts-how-will-you-deal-discount-issue-debentures-when-debentures-are-be-redeemed-instalments_79874
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