Sweat Equity Shares

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“Sweat equity shares” means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.(as defined in the Companies Act 2013)

Employee means –

(a) a permanent employee of the company who has been working in India or outside India, for at least the last one year; or
(b)     a director of the company, whether a whole time director or not; or

(c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company.

Value additions means actual or anticipated economic benefits derived or to be derived by the company from an expert and/or a professional for providing know-how or making available rights in the nature of intellectual property rights, by such person to whom sweat equity is being issued for which the consideration is not paid or included in-
(a) the normal remuneration payable under the contract of employment, in the case of an employee; and/or
(b)  monetary consideration payable under any other contract, in the case of non-employee.

Section.54. of COMPANIES ACT 2013 (1) Notwithstanding anything contained in section 53, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely:—

(a) the issue is authorised by a special resolution passed by the company;

(b) the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;

(c) not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business; and

(d) where the equity shares of the company are listed on a recognised stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.

CONDITIONS AND PROCEDURE FOR ISSUING SWEAT EQUITY SHARES [SECTION 54]

Conditions: [SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF SWEAT EQUITY) REGULATONS, 2002 ]

A company can issue sweat equity shares only of a class of shares already issued subject to fulfilment of conditions prescribed below:

General meeting and Special Resolution

  • A special resolution should be passed by the members of the company authorizing the issue of sweat equity shares containing details as specified below in the Checklist and Procedure.
  • The special resolution should be acted upon within a period of 12 months from the date of passing else it will become invalid and a fresh resolution will have to be passed again.
  • The explanatory statement to be annexed to the notice calling the general meeting must contain details as specified in the Checklist and Procedure stated below.

Limit on quantum of issue

  • The company shall not issue sweat equity shares for more than 15% of the existing paid up equity share capital in a year or shares of the issue value of Rs. 5 crores, whichever is higher.
  • The issuance of sweat equity shares in the Company shall not exceed 25% of the paid up equity capital of the Company at any time.

Pricing and valuation

  • The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as the fair price giving justification for such valuation.
    ‘valuer’ means a Chartered Accountant or a merchant banker appointed to determine the value of the intellectual property rights or other value addition
  • The valuation of intellectual property rights or of know how or value additions for which sweat equity shares are to be issued, shall be carried out by a registered valuer, who shall provide a proper report addressed to the Board of directors with justification for such valuation.
  • Copy of both the valuation reports should be sent to the shareholders along with the notice of the general meeting.

Accounting treatment

  • Where sweat equity shares are issued for a non-cash consideration on the basis of a valuation report in respect thereof obtained from the registered valuer, such non-cash consideration shall be treated in the following manner in the books of account of the company:

(a) where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the accounting standards; or

(b) where clause (a) is not applicable, it shall be expensed off as provided in the accounting standards

  • In respect of sweat equity shares issued during an accounting period, the accounting value of sweat equity shares shall be treated as a form of compensation to the employee or the director in the financial statements of the company.

Register of Sweat Equity Shares

  • The company shall maintain a Register of Sweat Equity Shares in Form No. 4.3 and shall forthwith enter therein the particulars of Sweat Equity Shares issued under section 54.
  • The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide.
  • Entries in the register shall be authenticated by the Secretary of the company or by any other person authorized by the Board for the purpose.

Other conditions

  • Regulatory provisions – In case of listed companies, the issue shall be regulated by the Securities and Exchange Board of India (SEBI) and shall be made in accordance with the regulations made by SEBI in this regard. In case of unlisted companies it will be regulated by the provisions of the Companies Act read with the rules made there under.
  • Terms of issue – The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank paripassu with other equity shareholders.
  • Time from commencement of business – At least 1 year should have elapsed since the date of commencement of business as on date of issue of shares.
  • Lock In – The sweat equity shares shall be subject to a lock in period of 3 years and this fact needs to be stated boldly on the face of the share certificates.
  • Disclosure in Board Report – Details regarding the sweat equity issue need to be disclosed in the Board’s Report of the year in which issue is made. The details to be disclosed are stated in the procedure below.

Checklist and Procedure:

  • Check the eligibility for issue of sweat equity shares based on the conditions stipulated above.
  • Obtain valuation report from a registered valuer.
  • Convene a Board meeting to decide the terms of issue and fix the time, date and place for convening general meeting to pass special resolution.
  • Dispatch notice of general meeting along with the explanatory statement containing following mandatory details

Contents of Explanatory Statement

(a) the date of the Board meeting at which the proposal for issue of sweat equity shares was approved;

(b) the reasons/justification for the issue;

(c) the class of shares under which sweat equity shares are intended to be issued;

(d) the total number of shares to be issued as sweat equity;

(e) the class or classes of directors or employees to whom such equity shares are to be issued;

(f) Principal terms and conditions on which sweat equity shares are to be issued, including basis of valuation;

(g) Time period of association of such person with the company;

(h) the names of the directors or employees to whom the sweat equity shares will be issued and their relationship with the promoter or/and Key Managerial Personnel;

(i) the price at which the sweat equity shares are proposed to be issued;

(j) the consideration including consideration other than cash, if any to be received for the sweat equity;

(k) would the ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity and how is it proposed to be dealt with;

(l) a statement to the effect that the company shall conform to the applicable accounting standards; and

(m) Diluted Earning Per Share(EPS) pursuant to the issue of sweat equity securities, calculated in accordance with the applicable accounting standards.

  • Convene general meeting and pass special resolution for issue of sweat equity shares
  • Hold Board meeting within 12 months and make allotment of sweat equity shares.
  • File return of allotment with ROC within 30 days of Board Meeting
  • Issue Share Certificates
  • Make entry in Register of Sweat Equity Shares
  • Make disclosure in Boards’ Report of the year in which sweat equity issue is made. Following disclosures are required in Boards’ Report :

Disclosures in Boards’ Report

(a) Class of director/ employee to whom sweat equity shares were issued;

(b) Class of shares issued as Sweat Shares;

(c) number of sweat equity shares issued to the directors, their relatives, key managerial personnel or other employees showing separately the number of such shares issued to them , if any, for consideration other than cash and the individual names of allottees holding 1% or more of the issued share capital ;

(d) the reasons/justification for the issue;

(e) Principal terms and conditions for issue of sweat equity shares, including pricing formula;

(f) the total number of shares arising as a result of issue of sweat equity shares;

(g) percentage of the sweat equity shares of the total post issued and paid up share capital;

(h) consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares;

(i) diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.

Author: Miss. Ruchika Adlakha, Student, BA LLB HONS, University School of Law and Legal Studies GGSIPU, DWARKA

Intern: Kaden Boriss Partners, Lawyers

Gurgaon, India

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