Introduction

The Companies Act, 2013 and related rules provide a detailed statutory framework for how companies may raise and manage capital, protect creditors and minority investors, and record changes in ownership of securities.

Three inter-related topics sit at the heart of corporate capital law and corporate housekeeping:

(1) the treatment and permissible application of premiums received on issue of shares;

(2) the general prohibition on issuing shares at a discount and the narrow statutory exceptions to that rule; and

(3) the law governing transfer and transmission of securities, including procedural safeguards in the era of dematerialisation.

This article explains the relevant statutory provisions, the practical consequences for companies and investors, and recent judicial and regulatory developments in India. Key statutory provisions discussed are Sections 52–56 of the Companies Act, 2013, the Companies (Share Capital and Debentures) Rules and relevant SEBI/depository guidance. Where useful, recent NCLT/NCLAT decisions and regulator actions are cited to show how courts and tribunals are applying the statutory scheme in practice.

Part I — Issue and Application of Premiums Received on Issue of Shares

1. Statutory Foundation: Section 52 of the Companies Act, 2013

Section 52 of the Companies Act, 2013 requires that, where a company issues shares at a premium, an amount equal to the aggregate premium received on those shares must be transferred to a distinct “securities premium account.” The statutory scheme treats this account as part of the company’s reserves but prescribes limited, specified purposes for which the securities premium account may be utilised. The text of Section 52 is mandatory in its opening direction to transfer the premium to the separate account and then prescriptive as to permitted uses. The official text is accessible on government portals.

2. Permitted Applications of the Securities Premium Account

The Act (and the Rules) permits utilisation of the securities premium account only for certain specified purposes, including (inter alia):

the issue of fully paid bonus shares;

writing off preliminary expenses of the company;

writing off commission or discount allowed on issue of shares or debentures;

providing for the premium payable on redemption of preference shares or debentures; and

buy-back of shares.

These permitted heads are exhaustive in the sense that departures are not allowed unless a procedure such as reduction of share capital under the Act is followed or specific statutory authority is obtained. The policy behind these restrictions is to prevent a company from treating premium collected from shareholders as freely distributable profits and thereby to protect creditors and minority shareholders.

3. Practical Accounting and Reporting Effects

In company accounts, the securities premium account appears under “other equity” and must be separately disclosed in the balance sheet and notes. Accounting standards prescribe how non-cash consideration that gives rise to premium should be recorded. Where a premium arises, the board must ensure formal transfer to the premium account and maintain contemporaneous records and board resolutions documenting the purpose and eventual utilisation (if any). Failure to segregate or to use the account for unauthorised purposes can attract regulatory scrutiny and remedial action by the Registrar of Companies (ROC) or by stakeholders in company law proceedings.

4. NCLT/NCLAT and Recent Practice — Using Securities Premium to Address Accumulated Losses

A notable practical issue in recent years has been petitions before the National Company Law Tribunal (NCLT) seeking permission to use securities premium balances to set off accumulated losses or to reorganise capital structure. Several NCLT orders record petitions where companies asked to debit their securities premium account to adjust balance sheet deficits; tribunals have carefully examined whether the proposed use falls within Section 52(2)’s permitted list or whether a statutory route for capital reduction (and related safeguards) is required.

NCLT benches frequently insisted on adherence to the statutory list and, in contested cases, either refused relief or permitted relief only after strict compliance with reduction-of-capital and creditor-notice requirements. These orders underline the limited elasticity of Section 52 and demonstrate that tribunals will not lightly allow premium funds to be treated as distributable reserves without statutory procedure.

5. Key Takeaways for Practitioners

Companies must plan uses of securities premium carefully. Using premium for any purpose other than the permitted list can be attacked as irregular and expose directors to liability. Where the business case requires rearrangement of capital (for example, to set off heavy accumulated losses), the correct route is commonly a formal scheme under the Act (for instance, reduction of capital with court/tribunal sanction) and not creative accounting. Several recent NCLT petitions and orders make this point practically relevant for companies seeking balance-sheet fixes.

Part II — Prohibition on Issue of Shares at Discount (Section 53): Rule, Rationale and Exceptions

1. The Rule: Section 53 — A Clear Prohibition

Section 53 of the Companies Act, 2013 provides the general rule that, except as provided in Section 54, a company shall not issue shares at discount. Sub-section (2) declares that any share issued by a company at a discount shall be void. The text is categorical and the legal consequences are severe for non-compliance: a void allotment creates a need for refund of monies received with interest, and exposes the company and responsible officers to penalties and civil consequences. The statutory prohibition is a long-standing protection designed to prevent artificial suppression of nominal capital and to ensure transparency in capital raising.

2. Policy Rationale

There are two principal policy rationales. First, issuing shares below face value can erode the company’s nominal capital base and thereby harm creditors who rely on statutory capital as a buffer. Second, discounting can facilitate inequitable bargains that prejudice existing shareholders and distort market valuation. For these reasons, the legislature has limited exceptions rather than permitted general discounting.

3. Statutory Exceptions to the Prohibition

Two narrow exceptions are worth emphasising:

(a) Section 54 — Sweat Equity Shares. The Act explicitly allows companies to issue sweat equity shares notwithstanding Section 53, subject to the conditions in Section 54 and the Companies (Share Capital and Debentures) Rules. Sweat equity enables issue of shares for non-cash consideration such as know-how, intellectual property or services rendered by employees or directors, and such issues may effectively equate to discounts because the consideration is non-monetary. The legislation therefore provides strict procedural safeguards (special resolution, valuation by registered valuer, disclosure, limit on quantum, lock-in etc.) to prevent abuse.

(b) Debt Conversion and Regulatory Debt-Restructuring Exception (post-amendments). In the context of insolvency, resolution plans and regulatory restructuring, law and regulatory policy have recognised that creditors may accept equity at a discount in order to salvage value. Amendments and rules (and regulatory guidance from RBI/SEBI in appropriate contexts) permit issue of shares at discount when done pursuant to statutory resolution plans or approved debt restructuring schemes as permitted by law and relevant regulators. This exception is tightly regulated to protect creditors and to conform to insolvency/resolution frameworks. Practically, such conversions occur under IBC-sanctioned plans or RBI-approved restructurings and involve court/tribunal/regulator oversight.

4. Consequences of Issuing at Discount Without Authority

If a company issues shares at discount in contravention of Section 53, the allotment is void; investors who paid consideration are entitled to refund with interest; the ROC and SEBI can take enforcement action; and directors may be liable for penalties. Recent commentary emphasises that market practice must avoid discounted issues unless one of the statutory exceptions applies. Tax and securities-law consequences may also follow, including scrutiny of rights issues or preferential allotments. Practitioner guides caution that even rights issues offered at a discount against the statutory prohibition can lead to substantial regulatory consequences.

Part III — Transfer and Transmission of Securities: Statute, Procedure and Recent Developments

1. Statutory Provisions: Section 56 and the Depositories Act

Section 56 of the Companies Act, 2013 governs transfer and transmission of securities. The section requires companies not to register a transfer of securities except on presentation of a proper, duly stamped instrument of transfer executed by transferor and transferee, delivered within the prescribed time with the share certificate. The modern securities ecosystem is governed jointly by the Companies Act, the Depositories Act, 1996 and SEBI regulations; transfers nowadays are overwhelmingly effected electronically (dematerialised) through depositories (NSDL/CDSL), but the Companies Act retains rules for physical transfers and transmission on legal events such as death, insolvency, order of court, etc. The official statute text and government commentary set out the present discipline.

2. Transfer versus Transmission — Conceptual Difference

Transfer is a voluntary act by which a shareholder (transferor) conveys ownership to another person (transferee) by executing a transfer instrument; transmission is the devolution of title by operation of law — for example, on the death or insolvency of a shareholder, the legal heirs succeed to the shares and may request the company to record the change. Transmission does not require execution of a transfer deed; however, companies require proof of the event (death certificate, succession certificate, probate, probate-equivalent documents) and follow internal procedures and depository rules before registering the change.

3. Dematerialisation, Depositories and the Modern Regime

The Depositories Act and SEBI regulations have transformed practical mechanics: most public company shares are held in demat form and transfers are executed by transfer through the depository system, eliminating the need for physical instruments. Section 56(1) was amended and read with depository rules to provide that companies shall not register transfers except where both parties’ names are on depository records, and that transfers shall be registered only on the basis of electronic instructions. This integration of company-law and depository processes means companies must coordinate with registrars and depository participants.

4. Procedural Steps for Transfer (Physical and Demat)

For physical shares, the transferee (or transferor) must deliver a properly stamped and executed transfer deed to the company, along with the share certificate. The company (or its registrar) must endorse the transfer and register the transferee within the statutory period unless there is valid objection.

For demat transfers, the transfer is effected in the depository system via a settlement instruction (off-market or market transfer), and the company registrar typically updates its register on receipt of the electronic confirmation. Stamp duty rules, KYC and transfer timing rules apply. SEBI has issued myriad operational guidelines for transfer timelines and registrar responsibilities.

5. Refusal to Register Transfer / Remedies

If a company refuses to register a transfer without valid cause, Section 58 and related provisions provide recourse: the applicant may serve notice and, on failure, may apply to the company or to the NCLT or appropriate forum for redress. Courts have long held that companies must not exercise arbitrary discretion, and refusal to register must be supported by the company’s articles or a legitimate statutory ground (for example, incomplete instrument, clutching of share certificate, or charge by the company). Tribunals and courts will examine whether procedural requirements were met and whether the company acted in good faith.

6. Transmission on Death and Succession — Practical and Case Law Considerations

Transmission cases commonly arise on the death of a shareholder. Companies require submission of death certificate and transmission application; where the estate is large or disputed, a succession certificate or probate may be demanded. Courts have held that companies must exercise reasonable care and may refuse registration only when documentary requirements are not fulfilled. Where multiple claimants assert competing rights, companies should preserve the shares and seek court guidance or accept a court order before altering the register. The demat system simplifies this in cases where nominations exist; SEBI mandated nomination facilities and depositories implemented electronic nomination processes to streamline transmissions in demat accounts.

7. Recent Regulatory and Judicial Highlights

Two practical developments are notable:

(a) SEBI’s Special Window for Re-lodgement of Physical Transfer Deeds (2025). SEBI announced a limited window for re-lodgement of physical transfer deeds for investors who missed earlier deadlines to digitise their holdings. This administrative step acknowledged the continuing hybrid reality—some shareholders still hold physical share certificates—and sought to protect buyers who failed to comply with earlier timelines. The initiative highlights regulatory attention to clean securities registers and investor protection in the demat era.

(b) Case Law on Demat Transfers and Registration Disputes. Courts and tribunals continue to adjudicate disputes arising from off-market transfers, broker mis-transfers, and cyclical nominee issues. Reported judgments and tribunal orders emphasise that where transfers are effected through depositories, the depository records govern beneficial ownership subject to documentary proof, but where fraud or error is alleged the registrars and companies must not abdicate responsibility and should take remedial steps and involve adjudicatory forums. Recent NCLT/NCLAT and High Court orders also consider whether registrars properly processed transfer requests and whether companies complied with the statutory timeframes.

Part IV — Synthesis: Compliance, Corporate Strategy and Practical Tips

1. For Boards and Company Secretaries

Companies must maintain strict compliance with Sections 52–56 and the related rules:

Ensure that premiums are placed in a separate securities premium account and used only for the permitted statutory purposes unless a formal reduction or tribunal-approved scheme is pursued. Document the board’s rationale and record independent approvals where necessary. Recent tribunal practice shows reluctance to permit ad-hoc uses of premium funds without statutory process.

Do not issue shares at discount save for properly authorised sweat equity issues or debt-conversion schemes executed in accordance with statutory/regulatory procedures. A mistaken discounted issue is void and costly to unwind. Have legal clearance before any preferential allotment, rights issue or restructuring that may have discount-like features.

In transfer and transmission matters, update articles and transfer processes for demat operations, maintain a responsive registrar service, and ensure proper documentation for transmissions on death or insolvency. Use nominations and periodic investor outreach to avoid stale or disputed holdings.

2. For Investors and Lenders

Investors should verify that share issues are made in compliance with the Act: premium receipts should be ring-fenced, rights issues should not be covert discounted issues, and transfer procedures should be properly followed. Lenders looking at hybrid capital instruments should inquire into the security, ranking and accounting treatment of premium funds and whether company bylaws permit reclassification or redemption that could affect creditor recovery.

3. For Regulators and Courts

Recent NCLT orders illustrate that tribunals will enforce statutory boundaries but also consider commercial realities when parties seek relief for balance-sheet adjustments. Courts and tribunals balance creditor protection with commercial pragmatism; where a legitimate restructuring is justified, judicial and tribunal processes offer remedies (for example, sanctioned reduction or judicial approval for unusual uses), but such relief requires transparent procedure and creditor notice.

Conclusion

The Companies Act’s provisions on securities premium, prohibition on issue of shares at discount, and transfer/transmission of securities reflect core policy goals: protect creditors and minority investors, ensure capital integrity, and provide a clear, predictable structure for ownership changes in both physical and electronic regimes. Section 52 rigidly prescribes the use of premiums, Section 53 forbids discount issues with narrow exceptions (including sweat equity under Section 54 and authorised debt conversions), and Section 56 coordinates traditional transfer formalities with modern dematerialised trading through depositories.

Recent tribunal practice and regulatory action emphasise strict compliance but also demonstrate pragmatic routes (tribunal-sanctioned schemes, regulated debt conversions, SEBI windows) for addressing exceptional circumstances in a regulated, transparent way. Practitioners, boards and investors must therefore observe the letter of the law while engaging the available statutory and adjudicatory mechanisms where business exigencies require tailor-made solutions.

Select Sources and Further Reading

Companies Act, 2013 — Sections 52–56 (India Code / Government text).

Companies (Share Capital and Debentures) Rules, 2014 — Rule provisions on/schedule for premium, sweat equity valuation and notices.

NCLT and NCLAT orders on utilisation of securities premium and petitions for reduction of capital (sample orders cited above).

SEBI announcements and press coverage regarding dematerialisation, and the July 2025 re-lodgement window for physical transfers

Practitioner updates and analyses on consequences of issuing shares at discount and on premium account usage (Taxmann, TaxGuru and corporate law blogs).