Indian company law includes several concepts that have become archaic. Efforts have been made to address this issue and to modernize company law – some the recent ones include a Concept Paper prepared by the Ministry of Company Affairs in 2004 and the JJ Irani Committee Report presented in 2005. However, these changes are yet to see the light of day.
This blog will periodically carry a discussion on some of the areas of Indian company law that necessitate modernization and review in the context of international practices. Some of these changes have already been contained in various recommendations to overhaul the Indian Companies Act, while others have not been addressed at all. The first among these relates to the concept of “par value” of shares.
Par value of shares (which is also commonly referred to as “nominal value”) is the minimum value or floor price at which shares can be issued by a company. While law encourages companies to issue shares at a price that is higher than the par value (the difference being known as “premium”), it abhors issue of shares are less than par value (the difference in this case being known as “discount”). Par value is a 19th century English concept that has found its way into the Indian Companies Act, 1956.
The ostensible justification for imposing par value on shares is two-fold: first, that it protects creditors a company and second, that it protects existing shareholders. Since shareholders will be obligated to bring in capital at least to the extent of the par value of the shares, it provides protection to creditors as they are able to assess the level of capitalization of a company. This would be particularly relevant where shares are partly paid, in which case shareholders would have a liability towards the company to the extent of the unpaid capital. As for existing shareholders, par value provides protection in that the company is prohibited (or substantially restrained) from issuing capital at a price less than the par value. By providing assurance of a minimum floor price on further capital issuances, it sets in place a kind of anti-dilution protection (as is currently in vogue though by contractual means).
Although par value may indeed have provided benefits to shareholders and creditors historically, its significance has eroded in modern company law. Consequently, several jurisdictions such as the United States (principally Delaware) and even Commonwealth countries such as Australia, New Zealand and Singapore (which largely drew their company law from England) have abolished par value on shares and shifted to a no-par value regime. Presently, England, several continental European countries and other countries such as India continue to follow the par value concept for issuance of shares.
Let us examine some of the adverse effects of par value. First, there is no clarity on a benchmark par value. Under the Indian Companies Act, companies are largely free to determine their own par value. In practice, the numbers range from Rs. 100 to Rs. 10 to even as low as Rs. 1 per share, depending on the nature of the company. For listed companies going for a public offering, however, SEBI does prescribe norms whereby companies will be permitted to fix low par values only if the price in the offering is above certain thresholds. Multiple par values in the markets create confusion to investors as they are unable to compare companies and their shares prices where their par values are different.
Second, since companies are largely free to fix their own par values, the protection it renders to shareholders and creditors is illusory. This is especially so when par values are so minimal as to not afford any protection at all.
Third, par value on shares introduces inflexibility in financing options for companies, especially those that are experiencing deterioration in their financial condition. Such companies may often require financial restructuring which involves induction of fresh capital at low prices. Existing law proves to be a hurdle as Section 79 of the Companies Act imposes onerous conditions (such as obtaining the approval of the Company Law Board) to issue shares at a discount, thereby making this option unviable. Par value hinders efficient restructurings or turnarounds of companies and thereby affects proper functioning of the industrial economy.
Fourth, the par value regime involves additional complexities on the accounting front. Share issuances at a premium require categorization of capital as par value and premium in the accounts and financial statements of the company. While that itself may not present significant problems, any restructuring of capital at a later stage will involve accountants having to make adjustments for both the par value and the premium. A no par value regime would be elegant in as much as it simplifies accounting matters considerably.
A no par regime will help overcome the disadvantages listed above, and allow for uniformity and homogeneity in shares of a class (all without par value). All shares will represent a proportionate part of the share capital of a company of the relevant class, and no more. The simplicity of the no par value regime outweighs the benefits of a par value regime and Indian company law ought to be move towards abolishing par value of shares.