Issue of Shares at Par , Premium and Discount

Shares are divisions of the share capital of a company. There are two basic types of share capital based on the types of shares which can be issued by a company i.e. (a) preference shares and (b) equity shares

Shares of a company may be issued in any of the following three ways.

  • At Par
  • At premium
  • At discount

When shares are issued and payable in installments then first installment is called as “application money”. Second installment is called as “allotment money “. Third installment is called as “first call money” and last installment is called as “Final call Money”.

Issue of Shares at par: When shares are issued at the face value means when the issue price is equal to the face value then it is called as the issue of shares at par.

Issue of Shares at Premium: When shares are issued at a price higher than the face value then it is called as the issue of shares at premium. The excess of issue price over the face value is the amount of premium. The premium on issue of shares is treated as revenue profits.

Issue of shares at discount: When the shares are issued at a price lower than the face value, they are said to be issued at discount.

Any company could not offer the shares at discount when

  • It is a new company
  • It is a new class of shares even though of an old company

The discount on issue of shares is treated as a loss of capital nature.

Example:

Let the face value of a share is Rs. 100.

In this case, when share is issued at Rs. 100 then it is called that share is issued at par.

Let the share is issued at Rs. 120 then it is called that share is issued at a premium of Rs 20 (Rs 120 –Rs. 100)

Let the share is issued at Rs. 90 then it is called that share is issued at the discount of Rs 10 (Rs 100 –Rs. 90)