Sweat Equity Shares | Section 54 | Companies Act 2013

SWEAT EQUITY SHARES:

Sweat equity shares are the shares given to directors/employees of the any company at a discounted price or other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions to the company. Section 54 of the Companies Act 2013 specify the provisions for the issuance of sweat equity shares of the class of shares already issued.

In general terms, we can say that sweat equity shares are the reward for the employees or directors of the company for their contribution in the company to get shares of the company whether it is public, private, OPC, section 8, listed or unlisted company at a lower price than the price prevailing in the market for the same class of the shares. As name of this issue contain the words “sweat”, it literally means that the shares are to be given in exchange of the efforts and hard work of the employees and the directors.

• For the above issue, employee means permanent employee who has been working in India or outside India also include employee of its holding and subsidiary company.
• The director means the director of the company whether whole time Director or not.
• Value addition means economic benefits derived to the company through an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights.

CONDITIONS OF THE ISSUE:

• It has to be authorised by the special resolution.
• Special resolution specifies the number of shares to be issued, their price, class of directors, employees to whom shares are to be issued, current market price of the same shares, consideration etc.
• If the shares issued under sweat equity shares are listed on any recognized stock exchange then SEBI regulations are also applicable on the company.
• All the rights, limitations, restrictions, provision, as are applicable to equity shares are also applicable to swat equity shares.

PROCEDURE FOR ISSUING SWEAT EQUITY SHARES:

1. Call and Conduct board meeting to consider the proposal of sweat equity shares and to decide the time, place and venue and date of the extraordinary general meeting to pass the special resolution for the same.

2. Issue notice of extraordinary general meeting along with explanatory statement, which includes following details:

• Date of the board meeting in which the proposal of issue is approved.
• Class of the shares, which are to issue under sweat equity shares.
• Class of employee and directors to whom shares are to be issued and the Time period of association of such person with the company.
• Principal terms and conditions for such issue.
• Reason/justification for the issue.
• Total number of shares to be issued and its price under sweat equity shares.
• The consideration to be received including consideration other than cash for such issue.
• A statement to the effect that, all the applicable accounting standards are followed by the company.
• The ceiling applicable on managerial remuneration, breached by such issuance then how to deal with the same.
• Diluted-earning per share, pursuant to such issue.

1. Conduct General Meeting and pass the special resolution.

2. File form MGT-14 within 30 days of passing the special resolution.

3. Call Board meeting for passing the board resolution for the allotment of sweat equity shares.

4. File form PAS-3 within 30 days of passing board resolution for the allotment of sweat equity shares.

5. Maintain register of sweat equity shares in form SH-3 containing the particulars of sweat equity shares.

OTHER IMPORTANT PROVISIONS PROVIDED UNDER RULES:

• The special resolution passed in the General Meeting shall be valid for a period of twelve months from the date of passing such resolution for the allotment of shares.
• The company shall not isuue sweat equity shares for more than 15% of its existing paid up equity share capital or shares of a value of Rs. 5 crore, whichever is more.

Provided that the issuance of sweat equity shares shall not exceed 25% of the paid up equity share capital of the company, anytime.

• The sweat equity shares issued to employees and directors shall be locked in for a period of three years from the date of allotment. e. the shares remain non-transferable for such period of time.
• Price of such sweat Equity Shares shall be determined by the registered valuer.
• Where sweat equity shares are issued for non- cash consideration, such non cash consideration shall be treated in the books of accounts as-
• Where non cash consideration takes the form of depreciable asset, it shall be carried to the balance sheet as per the accounting standards.
• Where clause (a) is not applicable, it shall be expensed as per the accounting standards.
• The sweat equity shares issued shall be treated as managerial remuneration for the purpose of sec 197 and 198, if following conditions are fulfilled:
• If Sweat equity shares given to any director.
• Such issue is for consideration other than cash, which has not taken form of an asset that can be carried to the balance sheet.
• The director report of the company shall also include following details for the year in which such issue takes place: such as- class of director to whom issue, class of shares, number of shares issued, reason for the issue, principal terms and conditions of the issue, total post issue share capital, consideration, diluted earning per share, etc.
• The company shall also maintain a separate register for such issue in form SH-3, which contain particulars of sweat equity shares. This registered shall be kept at the Registered office of the company under the custody of the company secretary.

(The author is a company secretary management trainee in Ghaziabad and can be contacted at [email protected].  You can also connect on linkedin at https://www.linkedin.com/in/shefali-garg-303451190. Any comments or queries are welcome).