ISSUE OF SHARES AT A PRICE LOWER THAN VALUATION REPORT

An unlisted company issuing shares on a preferential basis under Section 62(1)(c) of the Companies Act, 2013 (‘Act’ for short) the issue price is generally determined on the basis of a valuation report from a registered valuer registered with the Insolvency and Bankruptcy Board of India.

NETANALYTIKS TECHNOLOGIES LIMITED is a private Limited Company. The Board of the Directors of the said company has decided to raise funds by way of preferential allotment. For this purpose, the company appointed a Registered Valuer, registered with Insolvency and Bankruptcy Board of India. The Valuer valued the shares of the company at Rs.334.59 for each share, the face value of which is Rs.10/-.

The company had approved the preferential allotment of 16,766 shares at price of Rs. 334 per share in the Board meeting and thereafter in Shareholders Meeting held on 15.03.2022 assuming the price arrived at by the Registered Valuer could be rounded off. The company allotted 16,766 equity shares at a price of Rs. 334/- each to the identified persons. The company also filed the return of allotment in the prescribed manner thereafter.

Later, the company noticed that it has issued preferential shares at Rs.334/- which is less than the value of the Registered valuer @ Rs.334.59 which is in violation of the provisions of the Companies Act, 2013 and the company wanted to rectify the same. the company rectified the default by recovering remaining Rs. 0.59 per share along with interest at rate of 12%. The receipt of this differential amount was acknowledged by the Board of Directors on 17.02.2025.

However, the company has filed a suo-motu adjudication application admitting violation of provision of section 62(1)(c) of the Companies Act, 2013 read with provisions of Rule 13 of the Companies (Share Capital and Debenture) Rules, 2014 (‘Rules’ for short) before the Registrar of Companies, Karnataka.

Issues

The issues to be discussed in this case studies are as below-

• Whether issuing shares at a price lower than valuation report, even marginally, violates Section 62(1)(c) of the Act?

• Whether subsequent rectification of the default (recovery of differential amount with interest), suo motu application and absence of mala fide intent absolves liability under Section 450 of the Act?

First issue

As per Rule 13(3) of the Rules, the price of shares to be issued on preferential basis shall not be less than the price determined on the basis of valuation report of a registered valuer. The price of the share as per the Registered Valuer is Rs.334.59. The company allotted preferential shares at the rate of Rs.334/- i.e., after rounding off the fraction. Thus, the shares are allotted to the shareholders below the rate fixed by the Registered Valuer. The company also filed the return for this purpose with Registrar of Companies.

In the suo-motu adjudication application filed before the Registrar of Companies, the company contended that the difference is due to the rounding off the figure only but not with wilful intention. Further the difference amount was collected and the error was rectified. There was no loss to the shareholders.

Pursuant to the adjudication application filed by the company, a show cause notice dated 28.03.2026 was issued to the company and its officers in default through e-Adjudication module and through speed post on 30.03.2026 by the Registrar of Companies. Neither on behalf of the company nor its officers attended the personal hearing. The Registrar of Companies decided the cases based on the documents on record. The Registrar of Companies held that the preferential allotment made by the company at price lower than the price arrived at by the Registered Valuer resulted into violation of provision of Section 62(1)(c) read with Rule 13(3) of the Rules rendering the company and its officers in default liable for penalty under section 450 of the Act.

Thus, the first issue can be answered that issuing shares at a price lower than valuation report, even marginally, violates Section 62(1)(c) of the Act.

Second issue

For the second issue the main contention of the company, in its application is that issuing shares at a price lower than valuation report was rectified on noticing the default and the balance amount of shares is collected and the error is rectified. There is also no loss to the shareholders.

The Registrar of Companies observed and held that subsequent rectification does not erase initial noncompliance. Accordingly, a penalty of Rs. 10,000 each was imposed on the company and its officers. Since this default is a continuing one the Registrar of Companies imposed additional penalty on the company and its officers-in-default @ Rs.2 lakhs and Rs.50000/- respectively.

Thus, the second issue can be answered that the subsequent rectification of the default (recovery of differential amount with interest), and filing suo motu application by the company and its officers-in-default and absence of mala fide intent does not absolve the liability under Section 450 of the Act.

Conclusion           

If a valuation report has been obtained for issuing a preferential allotment of shares at a price lower than the value determined by the valuer is generally not advisable and may be legally vulnerable unless a specific statutory provision permits it.