CS S. Dhanapal
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.
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.
CONDITIONS AND PROCEDURE FOR ISSUING SWEAT EQUITY SHARES [SECTION 54]
A company can issue sweat equity shares only of a class of shares already issued subject to fulfillment of conditions prescribed below:
General meeting and Special Resolution
Limit on quantum of issue
Pricing and valuation
(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.
Register of Sweat Equity Shares
(a) the sweat equity shares are issued to any director or manager; and
(b) 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.
Checklist and Procedure:
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 pursuant to the issue of sweat equity securities, calculated in accordance with the applicable accounting standards.
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.
(Written by S.Dhanapal, Senior Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries, Chennai.)