Issue of Sweat Equity Shares

In the current scenario, an employee is the key of the success of every organization and every employee deserve to be compensated for the efforts made by them to make the organization successful in the competitive market and the issue of Sweat Equity shares is the best way to compensate them.

Now through this article, we are trying to brief out the procedure how to start with the issue of Sweat Equity and the points keep in mind before issuing the same.

Legal Reference

Section 54 of the companies Act, 2013 talks about the issue of Sweat Equity Shares which shall be read with Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014 along with the definition mentioned under Section 2(88) of the Companies Act, 2013.

Sweat Equity

Procedure for the Issue of Sweat Equity Shares

1. Identify whether the person is eligible for Sweat Equity or not and for eligibility check the following points:

Eligibility for Sweat Equity Shares

  • Permanent employee of the company who has been working in India or outside India;
  • Director of the company, whether a whole time director or not;
  • 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.

2. Check whether Company is under the monetary limit of issue of sweat equity shares and for this following points to be check:

Restrictions on Issue of Sweat Equity Shares

For One Time: 15% of the existing paid up equity share capital in a year or shares of the issue value of Rs. 5,00,00,000 (Rupees Five Crores), whichever is higher.

For Total: 25% of the paid up equity capital of the Company

3. After the above stages Company shall convene a Board Meeting after complying the necessary formalities for convening the Board Meeting and following items shall be taken in such Board Meeting:

  • Issue and approve the issue of Sweat Equity shares;
  • Appoint the Registered Valuer to obtain the Valuation report;
  • Authorization to Directors for Issue of notice for convening General Meeting for passing Special Resolution.

Pricing Guidelines for Sweat Equity Shares

The sweat equity shares to be issued shall be valued at a price determined by “REGISTERED VALUER” as the fair price giving justification for such valuation. Further, the valuation of IPR, know-how, or value additions for which equity shares are to be issued shall also be carried out by a registered valuer with proper justification.

And both the valuation reports should be sent to the shareholders along with notice calling the General Meeting.

4. After obtaining the Valuation report issue notice of General meeting and also attach the copy of valuation report with such notice.

The explanatory statement to be annexed to the notice of the general meeting shall contain the following particulars:

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

(b) the reasons or 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) the principal terms and conditions on which sweat equity shares are to be issued, including basis of VALUATION ;

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

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

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

5. Hold the General meeting and pass the special resolution to issue Sweat Equity Shares.

  • Time Period for Allotment of Sweat Equity Shares

The above SR shall be valid for a period of 12 months, So Company shall make the allotment within 12 Months from the Date of passing of Special Resolution.

Special Resolution shall includes the following points:

  • Number of Shares
  • Current Market Price
  • Class or classes of Directors/Employees to whom such equity shares are to be issued

6. After passing the SR, Company shall report the same to the Registrar of Companies in e form MGT 14 within 30 days of passing the Special resolution.

7. Company shall convene another Board Meeting for the allotment of said shares and make the said allotment of Sweat Equity shares to the prospective employee.

8. Once the allotment is done, Company shall file the return of allotment to the Registrar of Companies in e form PAS 3 within 30 days from the date of allotment.

9. After the allotment Company shall DELIVER the share certificate to the prospective employee within 60 days from the date of allotment.

Lock-in period:

3 Years from the Date of Allotment and the fact that the share certificates are under lock-in and the period of expiry of lock in shall be STAMPED IN BOLD or mentioned in any other prominent manner on the share certificate.

10. Register to record the entry:

The Company shall make the entry in the following registers:

  • Board of Directors shall make necessary entries in the register of members within 7 days from the date of allotment;
  • The company shall maintain a Register of Sweat Equity Shares in Form No. SH.3 and shall forthwith enter therein the particulars of Sweat Equity Shares issued under section 54 and the entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.

11. Payment of Stamp Duty

As per the respective state law every Company must pay the respective stamp duty on the issue of share certificate. Accordingly once the certificate of sweat Equity shares delivered to the prospective employee, Company shall prepare the documents for payment of stamp duty on issue of share certificate as per the respective state law and submit the same to the respective department for the payment of stamp duty.

The author is available at +91-9992693555, 0124-4007548 or mail us at sdeepak.cs@gmail.com.

Disclaimer –

This article is for the purpose of information and shall not be treated as solicitation in any manner and for any other purpose whatsoever. It shall not be uses as legal opinion and not to be used for rendering any professional advice

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