InvestorQ : Is it true that loss making companies may now be allowed to issue shares at a discount?
Angel dcosta made post

Is it true that loss making companies may now be allowed to issue shares at a discount?

Juvina Maggie answered.
4 weeks ago

While not much is known on the final form that these amendments will take, the government is working on some key amendments to the Companies Act. One of the announcements expected is that, loss making companies would be given the leeway to sell shares to the public at a discount to raise capital to reduce financial distress. Currently, selling the stock to the public below the face value is not permitted. Typically, companies have to either sell the stock at par or at premium to the par value.

This clause will be applicable in the case of companies that have been reporting business losses for three years in a row. Such companies will have the flexibility to sell shares at a discount to face value. Currently, that facility is only available to convert debt into equity as part of a rescue package that has been sanctioned by NCLT or the RBI. This will be a boon for such loss making companies and will also be a boost to some real long term high risk investors who are willing to take the risk of investing in distressed companies.

One positive fallout of this announcement would be that it would allow the government to infuse capital into an enterprise for shares even at a discounted price. This is useful, especially when such a move is in larger public interest. In the case of companies that are currently under bankruptcy proceedings, the ability to raise share capital at a discount would allow these companies to remain a going concern during the process. This allows such companies to meet routine expenses for source critical goods and services.