Section 53 of the Companies Act, 2013 prescribes that Company shall not issue shares on discount. Any shares issued by the Company at a discount shall be void. However, there are certain circumstances where Company can issue shares at a discount:

♦ Issue of Sweat Equity Shares

♦ Issue of shares to the Creditors when the debt of the Company is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or regulations as provided by the Reserve Bank of India under Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949

Issue of Sweat Equity Shares

“Sweat Equity Shares” means such equity shares as are issued by the 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 sweat equity shares shall be issued to the following category of employees which includes:-

> Permanent employee of the Company whether working in India or outside India;

> Director of the Company, whether a whole-time Director or not;

> Employee or Director as mentioned above of a Subsidiary in India or outside India, or of a Holding Company of the Company.

For issue of sweat equity shares, Listed Company shall comply with the provisions of Securities and Exchange Board of India (SEBI) Regulations on Sweat Equity and the Company other than listed company shall comply with the provisions of Section 54 of the Companies Act, 2013 and Rule 8 of Companies (Share Capital and Debentures) Rules, 2014.

Conditions for issue of Sweat Equity Shares by Unlisted Company

A Company may issue sweat equity shares to its Directors or employees of the Company at a discount or consideration other than cash. Sweat Equity shares is a reward given to the employees for their contribution towards fulfilling the objectives of the Company. It encourages the employee to work more for the development of the Company. The various conditions for the issue of Sweat Equity Shares by Unlisted Company are as:

1. Quantum of issue of Sweat Equity Shares

For One time: The Company shall not issue Sweat Equity Shares for more than 15% of existing paid-up share capital or issue value of shares Rs.5,00,00,000/- (Rupees Five Crores), whichever is higher.
For lifetime: The Company shall not issue Sweat Equity shares for more than 25% of the paid-up Equity Capital at any time.

Further the limit for issuance of Sweat Equity Shares for Start-up Company shall not exceed 50% of its paid-up capital upto 5 years from the date of its incorporation or registration.

2. Price of Sweat Equity Shares

The price of the Sweat equity shares shall be determined by the Registered valuer by providing valuation report as the fair price giving justification for such valuation.

3. Convene a Board Meeting

The Board of Directors of the Company shall call, hold and conduct Board meeting and discuss the matter in respect of issue of sweat equity shares and the Board of Directors may pass board resolution in favour of the same and also:

> Before consideration of issuance of Sweat Equity shares, the Company first ensures that Articles of Association (AOA) of the Company contains the provision for sweat equity shares and if not then take necessary steps for alteration of AOA and also ensure the proposed issue of sweat equity shares shall be within the limit of the authorised share capital, and if not take necessary steps for increase in the authorised share capital;

> Consider the proposal for issue of sweat equity shares;

> Fix the date, time and venue of the Extra-Ordinary General Meeting of the Company;

> Approve the draft notice of Extra-Ordinary General Meeting alongwith explanatory statement and the explanatory statement shall contain all the particulars as mentioned under Rule 8 of Companies (Share Capital and Debentures) Rules, 2014 and calling of meeting;

4. Convene Extra-Ordinary General Meeting

The Company shall hold General meeting and get approval from members by passing special resolution and the Special resolution shall specify:

> Number of issued Shares;

> Current Market Price of the shares;

> Consideration, if any;

> Name of the Directors or Employees to whom such shares has been issued.

5. Filing of form MGT-14

Company shall have to file MGT-14 to Registrar of Companies within 30 days from the date of passing of special resolution in the Extra-Ordinary General Meeting.

Attachments of form MGT-14

> Certified true copy of special resolution along with explanatory statement

> Shorter Notice consent, if any (In case if meeting is held on shorter notice)

6. Allotment of Shares

The allotment of sweat equity shares shall be made within a period of 12 months for the date of passing of Special Resolution.

7. Filing of form PAS-3

The Company shall file form PAS-3 to the Registrar within a period of 30 days from the date of allotment of sweat equity shares.

Attachments of form PAS-3

> Copy of special resolution authorizing issue of sweat equity shares

> Copy of Board Resolution for allotment of shares

> List of Allottees

> Valuation report as provided by the Registered Valuer

> Copy of an agreement or contract for allotting securities for consideration other than cash

> Any other documents as may be applicable

8. Issue of Share Certificate

The Company shall issue share Certificate in form SH-1 within a period of 2 months from the date of allotment of shares and also pay the stamp duty in accordance with the provisions of Indian Stamp Act, 1899.

9. Disclosure in Board’s Report

The Board Report for the year shall disclose the issue of sweat equity shares and provided the details

> Name of the Director or Employee to whom sweat equity shares are issued;

> Class of Sweat Equity shares and the number of shares issued to them, if any, for consideration other than cash and the individual name of the allottees holding 1% or more of the issued share capital;

> Reason for the issue;

> Terms and conditions for the issue;

> Total number of shares arising as a result of Sweat Equity Shares;

> Consideration received or benefit accrued to the Company due to this issue;

> Percentage of sweat equity shares of the total post issue and paid up share capital;

> Diluted Earnings per share (EPS) in respect of issue of sweat equity shares

10. Lock-in Period

The shares are non-transferable and are in lock-in period for a period of 3 years from the date of allotment and the share certificate shall also specifies the lock-in period on the same.

On expiry of lock-in period, the share certificate shall be stamped in bold or mentioned in any other manner that the lock-in period has been expired.

11. Register of Sweat Equity Shares

The Company shall maintain register of Sweat Equity in Form SH-3 and fill all the particulars as mentioned therein. The register shall be maintained at the registered office of the Company or such other place as Board decides and the same shall be authenticated by the Company Secretary (CS) or any person authorized by the Board for this purpose.

Other important provisions in respect of issue of Sweat Equity Shares

> Accounting treatment for issue of Sweat Equity Shares for non-cash consideration basis

In case if shares are issued for non cash consideration basis, then accounting treatment for such non-cash consideration in the books of accounts shall be:

  • Where non-cash consideration forms as depreciable assets, it shall be carried to the Balance sheet in accordance with accounting standards
  • Otherwise, it shall be treated as expense as provided in the accounting standards.

> Issue of Sweat Equity Shares treated as Managerial remuneration

The issue of Sweat equity shares shall be treated as a part of managerial remuneration for the purposes of Section 197 and 198 of the Companies Act, 2013, in case if following conditions are fulfilled:

  • the issue of sweat equity shares to any Director or Manager of the Company; and
  • shares are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet in accordance with the applicable accounting standards.

> The accounting value of the sweat equity shares shall be treated as compensation to the employee or the Director in the financial statement of the Company, if sweat equity shares are issued during an accounting period and are not issued in pursuant to acquisition of asset.

> If shares are issued pursuant to acquisition of an asset, as determined by the valuation report, shall be carried in the balance sheet as per the accounting standards and such amount of the accounting value of the sweat equity shares that is in excess of the value of the asset acquired, as per the valuation report, shall be treated as a form of compensation to the employee or the Director in the financial statements of the Company.

> The holders of the Sweat Equity Shares shall be rank pari passu with other equity shareholders.

Author Bio

Qualification: CS
Company: N/A
Location: Gurugram, Haryana, IN
Member Since: 22 Apr 2020 | Total Posts: 3
I Alka Gupta an Associate Company Secretary and would like to learn and grow at every given opportunity. View Full Profile

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