Corporate and Other Laws · Prospectus and Allotment of Securities

Issue of Shares at Premium, Discount and Sweat Equity: CA Intermediate Guide

Updated 4 October 2026 · Fact-checked

A company issuing shares above face value must credit the premium to the securities premium account under section 52(1). The account can be applied only for the purposes section 52 permits. The Act bars shares at a discount, but section 54 allows sweat equity shares, with a special resolution and the stated conditions.

Understand Issue of Shares at Premium, Discount and Sweat Equity

Premium means a company issues a share at more than its face value. If a ₹10 share is issued for ₹15, ₹5 is premium. Section 52(1) says a sum equal to the total premium received must go to the securities premium account. That account is treated like paid-up share capital for reduction purposes, so the company cannot freely use it like profit.

Section 52(2) lists the allowed uses: issuing fully paid bonus shares, writing off preliminary expenses, writing off expenses, commission or discount on an issue of shares or debentures, providing for premium payable on redemption of redeemable preference shares or debentures, and buy-back under section 68. Remember this list. It is a favourite exam point.

Section 52(3) is an additional route. It applies "notwithstanding" sections 52(1) and 52(2), to prescribed classes of companies whose financial statements comply with the accounting standards prescribed under section 133. Such companies may apply the account in paying up unissued equity shares as fully paid bonus shares, in writing off expenses, commission or discount on an issue of equity shares, and for buy-back under section 68. It does not take away the section 52(2) uses. Do not mix up the two sub-sections.

Discount means issuing shares below face value. As a general rule, the Act bars a company from issuing shares at a discount (section 53). Section 54 starts with "notwithstanding anything contained in section 53", so a sweat equity issue made under section 54 is not caught by that bar. The Act's definition of sweat equity shares describes them as shares issued at a discount or for consideration other than cash. Do not confuse the bar with section 52(2)(c), which allows the securities premium account to be used to write off discount allowed on an issue of shares or debentures.

Sweat equity shares, as the Act defines them, are equity shares issued to directors or employees at a discount or for consideration other than cash, for providing know-how or making available rights in the nature of intellectual property rights or value additions. Section 54 allows them only for a class of shares already issued, as the opening words of section 54(1) say. They rank pari passu with other equity shares, with the same rights and restrictions. An ESOP is a different tool: it is an option given to employees to buy shares in future. The two are not the same, so keep them apart in answers.

Key rules to remember

Securities premium credit: Securities premium = (Issue price − Face value) × Number of shares; Section 52(1) requires the premium actually received to be transferred to the securities premium account. Count only what has been received, so a premium due on a call not yet made is not yet credited.
Uses of securities premium, section 52(2): Bonus shares | Preliminary expenses | Expenses, commission or discount on issue of shares or debentures | Premium on redemption of redeemable preference shares or debentures | Buy-back under section 68; Five permitted uses. Paying dividend is not in the list, so it is not allowed.
Section 52(3) additional uses for prescribed companies: Bonus equity shares | Expenses, commission or discount on issue of equity shares | Buy-back under section 68; An additional route, notwithstanding section 52(1) and 52(2), for prescribed classes whose financial statements comply with the accounting standards under section 133. It does not withdraw the section 52(2) uses. Notice that it speaks of equity shares.
Sweat equity conditions, section 54(1): Special resolution + resolution specifies number of shares, current market price, consideration and class of directors or employees + class of shares already issued + SEBI regulations if listed, prescribed rules if not listed; The requirement of a class of shares already issued is in the opening words of section 54(1). Clause (c) of section 54(1) was omitted w.e.f. 7-5-2018. Quote only the conditions in the current text.
Rank of sweat equity: Sweat equity holders rank pari passu with other equity shareholders; Section 54(2). The rights and restrictions applicable to equity shares apply to them.

How to solve Issue of Shares at Premium, Discount and Sweat Equity questions

Use this order for any theory or case question on premium, discount or sweat equity.

1Read the facts and identify what is being issued: ordinary shares, sweat equity or ESOP. Note the issue price and face value.
2If the issue price is above face value, compute the premium and state that section 52(1) requires it to be credited to the securities premium account.
3If the issue is below face value, state that the Act bars a discount for ordinary shares, with sweat equity under section 54 as the exception.
4For sweat equity, test each condition of section 54(1): class already issued, special resolution, content of the resolution, and SEBI regulations or prescribed rules depending on listing.
5If the question asks how a premium balance can be used, match the proposed use against section 52(2). Then check whether section 52(3) also applies if the company is a prescribed class.
6State the conclusion in one clear line: allowed, not allowed, or allowed subject to conditions.
7Where journal entries are needed, credit share capital at face value and securities premium for the excess.

Quickest way: Provision, facts, conclusion in four lines

When to use it: Use this for 3 to 5 mark written answers and for MCQs that ask whether an item is permitted.

MCQs: ask only whether the use or issue appears in the section 52(2) list (or section 52(3) for a prescribed company) or meets section 54(1). If it does not, eliminate it.
Treat any option that pays dividend out of securities premium as wrong, since it is not in the list.
Written answer line 1: state the rule and section number.
Line 2: apply it to the numbers or facts in the question.
Line 3: state the conclusion in a single sentence. Step marks come from the section, the application and the conclusion, so write all three.

Common mistakes in Issue of Shares at Premium, Discount and Sweat Equity

Saying a company can never issue shares at a discount, with no mention of sweat equity.
Students remember the ban but forget the exception.
Fix: Write the rule as: the Act bars issue at a discount (section 53), but section 54 operates notwithstanding section 53, and the Act's definition describes sweat equity shares as shares issued at a discount or for consideration other than cash.
Confusing section 52(2)(c), which allows writing off discount on an issue of shares, with permission to issue shares at a discount.
Both mention the word discount.
Fix: Treat section 52(2)(c) as a use of the securities premium account for expenses, commission or discount already allowed on an issue. It does not permit a discounted share issue.
Using securities premium to pay dividend.
Students treat it as any other reserve.
Fix: Section 52(1) treats it like paid-up capital. Only the section 52(2) uses, and for prescribed companies the section 52(3) uses, are allowed.
Treating section 52(3) as a narrower list that replaces section 52(2) for prescribed companies.
Students see a shorter list and assume it cuts down the earlier one.
Fix: Section 52(3) applies notwithstanding sections 52(1) and 52(2). It is an additional route for prescribed companies, not a withdrawal of the section 52(2) uses.
Quoting conditions for sweat equity that are no longer in section 54(1).
Older notes may carry conditions from before the amendment.
Fix: Clause (c) of section 54(1) was omitted w.e.f. 7-5-2018. Quote only the conditions in the current text.
Treating ESOP and sweat equity as the same thing.
Both reward employees.
Fix: Say that sweat equity shares, as the Act defines them, are issued for know-how, intellectual property rights or value additions, at a discount or for consideration other than cash. An ESOP is an option to buy shares in future. Section 68(5)(c) deals with buy-back of securities issued to employees under a stock option or sweat equity scheme.
Crediting the whole issue price to share capital.
Students forget to split face value and premium.
Fix: Credit share capital with face value and securities premium with the excess, then check the section 52(1) credit.

Worked examples

Example 1

X Ltd issues 50,000 equity shares of ₹10 each at ₹16 per share, fully received in cash. Calculate the amount to be credited to securities premium account and state one use of it that is permitted and one that is not.

Show the solution

Premium per share = ₹16 − ₹10 = ₹6.
Total premium = 50,000 × ₹6 = ₹3,00,000.
Under section 52(1), ₹3,00,000 is transferred to the securities premium account.
Permitted use: issuing fully paid bonus shares, section 52(2)(a).
Not permitted: paying dividend, since it is not in the list in section 52(2) or 52(3).

Answer: ₹3,00,000 is credited to securities premium account. It may be used for bonus shares, but not for paying dividend.

Example 2

Y Ltd, an unlisted company, proposes to issue sweat equity shares to its employees of a class of equity shares already issued. State the conditions it must satisfy under the Companies Act, 2013.

Show the solution

Provision: section 54(1) allows sweat equity shares of a class already issued, notwithstanding section 53, if its conditions are met.
Condition 1: the issue must be authorised by a special resolution.
Condition 2: the resolution must specify the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom they are issued.
Condition 3: because Y Ltd is unlisted, the issue must follow the rules prescribed.
Section 54(2): the shares carry the same rights and restrictions as equity shares and rank pari passu with other equity shareholders.

Answer: Y Ltd can issue the shares if it passes a special resolution containing the specified details, issues a class already issued, and follows the prescribed rules as it is unlisted. The holders rank pari passu with other equity shareholders.

Exam tips

Learn the five uses in section 52(2) as a list. Examiners often ask which proposed use is allowed.
Write section 52(3) separately as an additional route for prescribed companies whose financial statements comply with the accounting standards under section 133. Do not say it replaces section 52(2).
For sweat equity, write the conditions as short points matching section 54(1) and add section 54(2) on pari passu ranking.
In MCQs, watch for options that look right but pay dividend or write off losses out of securities premium.
Contrast sweat equity with ESOP in one line if the question mentions employees.

Practice questions from Prospectus and Allotment of Securities

Issue of Shares at Premium, Discount and Sweat Equity in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Issue of Shares at Premium, Discount and Sweat Equity: frequently asked questions

Can a company issue shares at a discount under the Companies Act, 2013?

As a general rule, no. The Act bars a company from issuing shares at a discount (section 53). The exception is sweat equity shares: section 54 operates notwithstanding section 53, and the Act's definition describes sweat equity shares as shares issued at a discount or for consideration other than cash.

What can securities premium account be used for?

Under section 52(2) it can be used for fully paid bonus shares, preliminary expenses, expenses, commission or discount on an issue of shares or debentures, premium payable on redemption of redeemable preference shares or debentures, and buy-back under section 68. Section 52(3) gives an additional route for prescribed companies whose financial statements comply with the accounting standards under section 133.

What are the key conditions for issuing sweat equity shares?

A special resolution is needed. The resolution must state the number of shares, current market price, consideration and the class of directors or employees. The shares must be of a class already issued, and SEBI regulations apply if the company is listed, or prescribed rules if it is not.

How is sweat equity different from an ESOP?

Sweat equity shares are actual shares issued to directors or employees, often at a discount or for know-how or value additions, as the Act defines them. An ESOP is an option to buy shares in future. Keep this contrast to a few lines in your answer.