Article explains What is sweat equity shares under Companies Act, 2013, Definition of Sweat Equity Shares, Conditions for  issuance of sweat equity shares, Important Points while issuing Sweat Equity Shares, Disclosures to be made in board of directors report of the year in which sweat equity shares are issued and Provisions and procedures relating to issue of sweat equity shares for Both Public and Private Limited Companies.

Introduction- What is sweat equity shares?

Sweat equity shares refers to equity shares given to the company’s employees on favorable terms, in recognition of their work. Sweat equity shares is one of the modes of making share based payments to employees of the company. The issue of sweat equity shares allows the company to retain the employees by rewarding them for their services. Sweat equity shares rewards the beneficiaries by giving them incentives in lieu of their contribution towards the development of the company. Further, Sweat equity shares enables greater employee stake and interest in the growth of an organization as it encourages the employees to contribute more towards the company in which they feel they have a stake.

abstract word cloud for sweat equity with related tags and terms

Definition of Sweat Equity Shares

As per section 2(88) of the Companies Act, 2013 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.

The Explanation to Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014 amended by the Companies (Share Capital and Debentures) Second Amendment Rules, 2018, w.e.f. 7-5-2018 provides that for the purposes of section 54 and this rule,

(i) Employee means—

(a) a permanent employee of the company who has been working in India or outside India; 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.

(ii) 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 the normal remuneration payable under the contract of employment, in the case of an employee.

What are the conditions for  issuance of sweat equity shares?

According to section 54, a company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled:—

i. the issue of sweat equity shares is authorised by a special resolution passed by the company in general meeting;

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

iii. Omitted by the Companies (Amendment) Act, 2017, w.e.f. 7-5-2018, vide Notification No. SO 1833(E), dated 7-5-2018.

iv. 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 SEBI 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.

Important Points while issuing Sweat Equity Shares

  • Every unlisted public company making any offer for issue of any securities, before making such offer has dematerialized of its securities held by its promoters, directors, key managerial personnel in accordance with provisions of the Depositories Act, 1996 and regulations made there under.
  • Who subscribesto any securities of an unlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd October, 2018 shall ensure that all his existing securities are held in dematerialized form before such subscription.
  • Article of association authorizes for issuance of sweat equity shares, if the article of association have no provisions, then first alter the articles of association to include the provisions for issue of sweat equity shares.
  • Whether authorized capital is sufficient for issue of sweat equity shares, and if authorised capital is not enough, then first alter the capital of company by altering of Capital Clause of the Memorandum of Association.
  • Sweat equity shares in a year are issued upto 15% of existing paid up capital or shares of issue value of Rs. 5 crores, whichever is higher.
  • Sweat equity shares by a start-up company are issued upto 50% of paid up capital upto 5 years from the date of incorporation.
  • Sweat equity shares are issued to directors or employees with a locked-in and non-transferable for a period of 3 years from the date of allotment.
  • The valuation of intellectual property rightsor of know how or the 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.
  • 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.
  • Sweat equity shares issued to directors or manager for consideration other than cash are treated as managerial remuneration for the purposes of section 197 and section 198 of the Companies Act, 2013.

Disclosures to be made in board of directors report of the year in which sweat equity shares are issued:

  • the class of director or employee to whom sweat equity shares were issued;
  • the class of shares issued as Sweat Equity Shares;
  • the number of sweat equity shares issued to the directors, 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 one percent or more of the issued share capital;
  • the reasons or justification for the issue;
  • the principal terms and conditions for issue of sweat equity shares, including pricing formula;
  • the total number of shares arising as a result of issue of sweat equity shares;
  • the percentage of the sweat equity shares of the total post issued and paid up share capital;
  • the consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares;
  • the diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.

Provisions and procedures relating to issue of sweat equity shares

  • Convening Board Meeting of Company and passed the following resolution.
    • Issuance of sweat equity shares.
    • Appointment of Registered Valuer.
    • Authorisation to Director/Company Secretary to sign the documents.
    • Fixing day, date, time and venue for calling general meeting.
    • Approving notice of general meeting for passing special resolution for issuance of sweat equity shares.
  • Prepare draft minutes of the board meeting and circulate, within a period of fifteen days from the date of conclusion of that meeting, to all directors, by hand/speed post/ registered post/courier/e-mail or by any recognised electronic means, for their comment(s).
  • Convene general meeting and pass special resolution for issue of sweat equity shares.
  • Prepare draft minutes of shareholders’ meeting and for finalization, send the draft minutes to the chairman of that meeting.
  • File eForm MGT14with the Registrar of Companies along with attachments for registering special resolution passed in the general meeting.
  • Minutes of the shareholders’ meeting shall be signed and dated by the chairman of that meeting.
  • Prepare notice of board meeting along with draft resolution(s) to be passed in the board meeting.
    • Send notice of board meeting to all the directors at least 7 days before the date of board meeting or in such manner as prescribed under section 173(3) of the Companies Act, 2013 and clause 1 of the Secretarial Standard-1.
    • Convene board meeting within 12 months of passing of special resolution and to pass resolution for Allotment of shares.
    • Authorise to sign and issue the share certificates and other documents, etc.
  • Prepare draft minutes of the board meeting and circulate, within a period of fifteen days from the date of conclusion of that meeting, to all directors, by hand/speed post/registered post/courier/e-mail or by any recognised electronic means, for their comment(s).
  • Minutes of the board meeting shall be signed and dated by the chairman of that meeting or by the chairman of the next meeting.
  • Prepare list of allottees for filing with the Registrar of Companies.
  • File the e-Form PAS-3 along with attachments with the Registrar of Companies within 30 days of allotment.

 In case of Private Limited Companies:

  • Prepare share certificate and get them stamped.
  • Issue share certificate to the respective allottees within two months from the date of allotment of shares as per section 46 of the Act and Rule 5 of the Companies (Share Capital and Debentures) Rules, 2014.
  • (Please follow procedure for e-stamping of share certificates)

 In case of Public Limited Companies:

  • Issue letter of allotment to the allottees and ask them to furnish their demat account details.
  • Prepare Corporate Excel Form in respect of allotment of securities and submit the same to the Depository and to Registrar to the issue of the company.
  • Receive confirmation from the Registrar to the issue that it has credited securities in demat account of all the allottee within 60 days of allotment.

Receive credit advice from the Depository and on the basis of that credit advice, pay stamp duty on the allotted securities. (Please follow procedure for payment of stamp duty on the allotted securities)

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Company: Legal Forever
Location: Delhi, Delhi, India
Member Since: 19 Nov 2019 | Total Posts: 21
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