“Learn about Sweat Equity Shares and the process of issuing them. Explore limits, valuation procedures, and steps to issue shares under the GST Act. Discover tax implications and compliance details. Make informed decisions on this unique form of share issuance.”

‘Sweat Equity Shares’ represent a unique form of share issuance by a company to its directors or employees. These shares are granted at a reduced value or in exchange for non-monetary contributions, such as expertise, intellectual property rights, or value-added enhancements, under various designations.

For a non-listed company to allocate sweat equity shares to its employees, directors, or individuals falling under the employee category, the company must obtain members’ approval and adhere to an approved Special Resolution.

The term ‘value addition’ denotes tangible or intangible benefits bestowed upon the company, either directly or indirectly, in the form of intellectual property rights or similar advantages.”

Equity Shares

Limits for issuance of sweat equity shares:

As per act, the company shall not issue sweat equity shares for more than fifteen percent of the existing paid-up equity share capital in a year

or

shares of the issue value of rupees five crores,

whichever is higher:

Provided to issuance of sweat equity shares in the Company shall not exceed twenty five percent, of the paid-up equity capital of the Company at any time.

Lock in period: The issuance of sweat equity shares in the Company shall not exceed twenty five percent of the paid-up equity capital of the Company at any time.

The above fact shall be mentioned in the share certificates along with company stamp. bold or mentioned in any other prominent manner.

Valuation Procedure:

1. The price of the sweat equity shares shall be evaluated by Registered Valuer.

2. The valuation of intellectual property rights or of know how or value additions shall be also be evaluate by registered valuaer.

Procedure to issue Sweat Equity Shares:

  • take valuation report from registered valuer for valuation of issuance of sweat equity shares.
  • Convene and hold a board meeting to consider the proposal of issue of sweat equity shares and to fix up the date, time, place and agenda for general meeting and to pass a special resolution for the same.

(Articles of Association should have enabling provisions or allowing the ESOP.  If not, then amendment would be required by convening EGM. There has to be sufficient authorized capital to accommodate the ESOP allotments. If not, then MOA and AOA need alterations).

Points to be disclosed in explanatory statement:

(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.

(m) diluted Earnings Per Share pursuant to the issue of sweat equity shares, calculated in accordance with the applicable accounting standards.

– Convene the General Meeting and Pass a special resolution for approval of issue of sweat equity shares.

(Validity of Special Resolution- 12 months from the date pf passing SR (the allotment shall be made within these 12 months)

  • File the resolution with MCA in Form No. MGT-14 within 30 days of passing the same.
  • Call the Board Meeting and Allot sweat equity shares in the meeting.
  • File Form No. PAS-3 within 15 days of passing of the Board resolution for allotting sweat equity shares.

Treatment of sweat equity shares issued on behalf of consideration other than cash:

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 as provided in the accounting standards.

Point to be noted, The amount of sweat equity shares issued shall be treated as part of managerial remuneration as mentioned in the sections 197 and 198 of the Act, if the following conditions are fulfilled:

(a) the sweat equity shares are issued to any director or manager and they are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards.

Following Points to be disclosed in Directors Report:

(a) the class of director or employee to whom sweat equity shares were issued;

(b) the class of shares issued as Sweat Equity Shares;

(c) 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;

(d) the reasons or justification for the issue;

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

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

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

Tax applicability on sweat equity shares:

Sweat equity shares are taxed as a remuneration in the hands of employees on the difference between the Shares’s fair Market Value and the issue price.

*****

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.       

For any query, kindly contact to kapil.agrawal4949@gmail.com

Author Bio

Qualification: CA in Practice
Company: N/A
Location: East Delhi, Delhi, India
Member Since: 14 Jul 2020 | Total Posts: 5
I am Practicing Chartered Accountant having office in Karol Bagh Delhi. My firm name is K Kapil & Associates. I have five year experience and i am dealing all the matters in related to Tax, GST, ITR, and Company Laws matters etc. My contact no is 8595295351 and email id is kapil.agrawal4949@gmai View Full Profile

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