Companies Act 2013 Section 85

Companies Act 2013 Section 85 regulates the issuance of shares at a discount. It is a critical provision ensuring that companies do not undermine their capital structure by issuing shares below their nominal value, except under specific conditions. This section plays a vital role in maintaining the financial integrity and transparency of companies.

Understanding Section 85 is essential for directors, shareholders, company secretaries, and legal professionals. It helps safeguard the interests of investors and creditors by preventing undervaluation of shares, which could affect company solvency and shareholder equity. Compliance with this section is a key aspect of corporate governance and statutory adherence.

Companies Act Section 85 – Exact Provision

This provision prohibits companies from issuing shares below their face value, except as specifically allowed under the Act. The rule protects the company’s capital base and ensures fair treatment of shareholders. Any issuance at a discount without legal sanction is void and may attract penalties.

• Prohibits issuance of shares at a discount generally.

• Allows exceptions only as per the Act’s provisions.

• Ensures protection of company capital and shareholder interests.

• Invalidates unauthorized discounted share issuance.

• Supports transparency and financial discipline.

Explanation of Companies Act Section 85

This section clearly states that issuing shares at a discount is not permitted unless explicitly allowed by law.

• Applies to all companies issuing shares.

• Directors and company officers must ensure compliance.

• Mandatory requirement: no discount issuance except as per law.

• Trigger: any proposal to issue shares below nominal value.

• Permitted only under specific legal exceptions, e.g., sweat equity shares.

• Prohibits unauthorized discounted share issuance.

Purpose and Rationale of Companies Act Section 85

The section aims to uphold the financial health and credibility of companies by regulating share issuance pricing.

• Strengthens corporate governance by enforcing capital rules.

• Protects shareholders and creditors from dilution and undervaluation.

• Ensures transparency in capital raising activities.

• Prevents misuse of company shares to manipulate financial statements.

When Companies Act Section 85 Applies

This section applies whenever a company contemplates issuing shares, ensuring compliance with pricing rules.

• Applicable to all companies issuing shares.

• Relevant at the time of share issuance decisions.

• Triggers include new share allotments or capital restructuring.

• Exceptions apply only as per specific provisions in the Act.

Legal Effect of Companies Act Section 85

This provision creates a strict prohibition on issuing shares at a discount, except as allowed by law. It imposes duties on directors to comply and requires disclosures in filings. Non-compliance renders the share issuance void and may attract penalties. The section interacts with MCA rules governing share capital and filings.

• Creates a legal restriction on share pricing.

• Directors must ensure lawful issuance.

• Non-compliance leads to invalid shares and penalties.

Nature of Compliance or Obligation under Companies Act Section 85

Compliance is mandatory and continuous for all share issuances. Directors and officers bear responsibility to prevent discounted issuance unless legally permitted. It influences internal governance by requiring adherence to capital rules and proper approvals.

• Mandatory compliance for all share issuances.

• Ongoing obligation during capital raising.

• Responsibility lies with directors and company officers.

• Impacts internal approval and documentation processes.

Stage of Corporate Action Where Section Applies

The section is relevant at multiple stages of corporate action, primarily during share issuance and related approvals.

• Incorporation stage if shares are issued initially.

• Board decision stage for allotment approval.

• Shareholder approval stage if required.

• Filing and disclosure stage with MCA.

• Ongoing compliance during capital changes.

Penalties and Consequences under Companies Act Section 85

Issuing shares at a discount without legal sanction can lead to monetary fines, invalidation of shares, and potential director liabilities. The company and officers may face penalties under the Act, including disqualification and remedial directions.

• Monetary fines on company and officers.

• Invalidation of discounted shares.

• Possible director disqualification.

• Additional fees or corrective actions mandated.

Example of Companies Act Section 85 in Practical Use

Company X planned to issue shares at a 10% discount to raise capital quickly. Director X reviewed Section 85 and realized this was prohibited unless under sweat equity rules. The company instead issued shares at par value, complying with the law and avoiding penalties. This ensured shareholder trust and regulatory compliance.

• Shows importance of legal review before share issuance.

• Highlights risk of non-compliance and benefits of adherence.

Historical Background of Companies Act Section 85

Section 85 evolved from similar provisions in the Companies Act, 1956, reflecting the need to regulate share pricing strictly. The 2013 Act retained and clarified these rules to strengthen capital market integrity and protect investors.

• Derived from Companies Act, 1956 provisions.

• Introduced in 2013 for clearer regulation.

• Amended to align with modern corporate practices.

Modern Relevance of Companies Act Section 85

In 2026, Section 85 remains crucial amid digital filings and e-governance. It supports transparent capital raising and aligns with ESG and governance reforms. Companies use MCA portal disclosures to ensure compliance and investor confidence.

• Supports digital compliance via MCA portal.

• Enhances governance reforms and transparency.

• Maintains practical importance in capital markets.

Related Sections

• Companies Act Section 2 – Definitions relevant to corporate entities.

• Companies Act Section 42 – Private placement of securities.

• Companies Act Section 62 – Further issue of share capital.

• Companies Act Section 52 – Share certificates.

• IPC Section 447 – Punishment for fraud.

• SEBI Act Section 11 – Regulatory oversight for listed companies.

Case References under Companies Act Section 85

No landmark case directly interprets this section as of 2026.

Key Facts Summary for Companies Act Section 85

• Section: 85

• Title: Issue of Shares at Discount

• Category: Governance, Compliance, Finance

• Applies To: All companies issuing shares, directors, officers

• Compliance Nature: Mandatory, ongoing during share issuance

• Penalties: Monetary fines, invalid shares, director liabilities

• Related Filings: Share allotment disclosures with MCA

Conclusion on Companies Act Section 85

Companies Act Section 85 is a fundamental provision that safeguards the financial integrity of companies by prohibiting the issuance of shares at a discount. It ensures that companies maintain their capital base and protect shareholder interests, promoting trust and transparency in corporate operations.

Directors and company officers must be vigilant in complying with this section to avoid legal consequences and maintain good governance. This provision remains highly relevant in today’s corporate environment, supporting sound financial practices and regulatory adherence.

FAQs on Companies Act Section 85

What does Section 85 of the Companies Act 2013 prohibit?

Section 85 prohibits companies from issuing shares at a discount, except in cases allowed by law. This protects the company’s capital and shareholder interests.

Are there any exceptions to issuing shares at a discount under Section 85?

Yes, exceptions exist such as issuing sweat equity shares at a discount, but these must comply with specific provisions and approvals under the Act.

Who is responsible for ensuring compliance with Section 85?

Directors and company officers are responsible for ensuring that shares are not issued at a discount unless legally permitted, maintaining compliance with the Act.

What are the consequences of violating Section 85?

Violations can lead to monetary penalties, invalidation of shares issued at a discount, and possible disqualification of directors involved.

How does Section 85 impact corporate governance?

Section 85 strengthens corporate governance by enforcing fair capital practices, ensuring transparency, and protecting shareholder rights during share issuance.