CS Deepak Pratap Singh
Sweat Equity Shares are Shares or Specified Securities issued at discount or for consideration other than cash to employees or directors of the company as reward their hard work or for their value addition in the progress of the company . These are generally issue in lieu of value additions and against providing Intellectual Property Rights by the employees or directors to the Company.
In this case employees means;
Value Addition; means actual or anticipated economic benefits derived or to be derived by the company from an expert/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 shares is being issued for which is not paid.
Section 2(h) of Securities Contract Regulation Act, 1956 defined “Securities “, which includes following;
The following conditions to be satisfied to tax allotment of Sweat Equity Shares in the hand of the employees or directors of company;
If above conditions are satisfied ,perquisite will be taxable in the hands of employees in the assessment year relevant to previous year in which shares or securities are allotted or transferred to the employee.
The valuation for Securities will be done on Fair Market Value of securities at the date of exercise of option by the employee.
VALUATION OF SPECIFIED SECURITIES OR SWEAT EQUITY SHARES;
QUOTED SHARES; If the shares of the company is listed on any Stock Exchange, then the Fair Market Value will be average of opening price and closing price of the share on that date. If shares of the company is listed on more than one Stock Exchanges , then the Fair Market Value will be average of Opening Price and Closing Price of shares on that Stock Exchange on which records highest volume of trading of shares of the Company. Where at the date of exercise of option , there is no trading of shares on any Sock Exchange, then the Fair Market Value will be the closing price of the shares on any Stock Exchange on a date closest to the date of exercise of option and immediately preceding such date.
UNQUOTED SHARES; if the shares of Company is not listed on any Stock Exchange then the Fair Market Value of Shares will be as determined by the Merchant Bankers on the Specified Date.
“Specified Date”; means the date of exercise of the option, or any date earlier the date of exercise of the option, not being a date, which is more than 180 days earlier than the date of excursive of the option.
NOW LET US CONSIDER AN EXAMPLE;
Mr. A is a Scientist have patent in the field of Information Technology and based in UK. He has joined an Indian company on January 1, 2007 on Salary or Rs. 3, 00,000/- pm in X Limited. X Limited has provided him an option to allot 1,000 Equity Shares in lieu of utilising his patent work for the purpose of the company;
|Date of granting the option||January 2, 2007|
|Date of vesting of the option||December 31, 2007|
|Nature is the option||To purchase, 1000 shares in X Limited at pre-determined price of Rs. 1/ Share at any time during 31st December, 2007 to 31st December, 2015|
|Date of exercise of option (allotment of one lot of 600 Shares)||January 1, 2009|
|Date of allotment of 600 Shares||January 1, 2009|
|Fair Market Value on December 31, 2007||Rs. 7,000/ Share|
|Fair Market Value on January 1, 2009||Rs. 7,500/ Share|
|Date of Exercise of option ( lot of 400 shares)||March 25, 2014|
|Date of allotment ( lot of 400 Shares)||April 1 , 2014|
|Fair Market Value on March 25, 2014||Rs. 7,500/ Share|
|Market value of patent rights provided by Mr. A to X Limited||Rs. 60,00,000|
LET US ANALYSE ABOVE CONDITIONS;