Issue of Sweat Equity Shares & Checklist

CHECKLIST FOR THE ISSUE OF SWEAT EQUITY SHARES FOR UNLISTED COMPANIES

Covering Sections /Provisions	Section 2(88) : Definition Clause
	Section 54 :  Issue of Sweat Equity Shares Rule 8 of Companies (Share Capital & Debentures) Rules, 2014
	Post Issue Disclosure Requirement
For Listed Companies	SEBI (Securities and Exchange Board of India) Regulations, 2002

Introduction:

There are limited ways under the Companies Act, 2013 (“Act”) wherein dedicated employees of the company can be rewarded or remunerated by issue of shares. One of the ways of rewarding or remunerating such employees is issue of sweat equity shares by the company. As per the definition of sweat equity, there is a reference to the expression “value additions”. It means actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights, by such employee.

This article is a checklist for private companies and unlisted public companies for the issue of sweat equity shares under the Act and the Rules made thereunder. The listed companies shall comply with the SEBI (Securities and Exchange Board of India) Regulations, 2002 in addition to the provisions of the Act.

A.      Section 2(88) : Definition Clause

“Sweat Equity Shares” so as to mean 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

B.      Section 54 :Issue of Sweat Equity Shares

Eligibility

[As amended vide The Companies (share capital and Debentures) second AmendmentRules, 2018 Dated 7th May 2018.]

Following are eligible for sweat equity shares:

• Employee of the Company.
• Director of the company excluding Independent director

Explanation:

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 of a holding company of the company;

Conditions to be fulfilled for the issue of Sweat Equity Shares- CRUX

(As amended by the Companies (Amendment) Act, 2017 - Effective from 7th May 2018)

Read with rule 8 of companies (share capital & debentures) rules 2014

1.      Sweat Equity Shares can be issued at a discount or for consideration other than cash,

2.      Requires authorization by a special resolution passed by the company in general meeting.

3.      The said special resolution authorising the issue of sweat equity shares shall be valid for making the allotment within a period of not more than twelve months from the date of passing of the special resolution.

4.      Limit on Issue of Sweat Equity Shares: The company shall not issue sweat equity shares for more than 15% of total paid up equity share capital in a year or shares of the value of 5 crores of rupees, whichever is higher.

[Provided that 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]

5.      The sweat equity shares shall be issued with a lock-in period of three years.

6.      Shares issued at a fair price that is valued by a registered valuer.

7.      Amount of sweat equity shares can be treated as managerial remuneration if it fulfills the conditions

¹["Provided further that a startup company, as defined in notification number GSR 180(E) dated 17th February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of lndia, may issue sweat equity shares not exceeding fifty percent of its paid up capital upto five years from the date of its incorporation or registration."]---- Inserted by the Notification Companies (Share Capital and Debentures) Third Amendment Rules, 2016 Dated 19th July, 2016.

8.      Sweat Equity shares are shares only of a class already issued by the Company

9.      Call Board Meeting for calling EGM for the issue of Sweat Equity Shares

10.    The Explanatory Statement should include the following details:

(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; and

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

11.    Pricing of Sweat Equity Shares:- The price of sweat equity shares to be issued to employees and directors shall be at a fair price calculated by an independent valuer.

12.    Lock-in of sweat equity shares:- Sweat equity shares issued to employees or directors shall be locked in for a period of three years from the date of allotment and the fact that the share certificates are under lock-in and the period of expiry of lock in shall be stamped in bold or mentioned in any other prominent manner on the share certificate.

13.    Issue at Consideration other than cash and treatment thereof in the books of account:

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.

14.    The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purposes of sections 197 and 198 of the Act, if the following conditions are fulfilled, namely.-

(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.

15.    In respect of sweat equity shares issued during an accounting period, the accounting value of sweat equity shares shall be treated as a form of compensation to the employee or the director in the financial statements of the company, if the sweat equity shares are not issued pursuant to acquisition of an asset.

16.    If the shares are issued pursuant to acquisition of an asset, the value of the 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.

C.      POST ISSUE DISCLOSURES 

The Board of Directors shall, inter alia, disclose in the Directors’ Report for the year in which such shares are issued, the following details of issue of sweat equity shares namely:-

(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.

Register of Sweat Equity Shares as per Format of the Rules

The company shall maintain a Register of Sweat Equity Shares in Form No. SH.3 and shall forthwith enter therein the particulars of Sweat Equity Shares so issued.

·         The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide.

·         The entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.

FORM NO. SH.3

Register of Sweat Equity Shares

[Pursuant to section 54 of the Companies Act, 2013 and rule 8(14) of the Companies (Share Capital and Debentures) Rules 2014]

S. No.	Reference to entry in register of members	Name of the allottee	Status of the allottee – whether director or employee	Date of passing of Board resolution
1	2	3	4	5

Date of the special resolution authorizing the issue of sweat equity shares	Date of issue of sweat equity shares	Number of sweat equity shares issued	Certificate No. / Folio No.
6	7	8	9

Face value of  the share	Price at which the shares are issued	Amount to be treated as paid up	Total consideration paid, if any, by the employee / director
			Consideration received in cash	Particulars of consideration other than cash
10	11	12	13	14

Lock in period	the date of expiry of lock-in- period	Remarks, if any	Date of Joining	Fair value obtained by Valuer	Basis of Valuation	Name of Valuer
15	16	17	5	12	13	14

Benefits of Sweat Equity for Employees

New age companies are keen to keep the best employees who bring in their know-how, and technical expertise that adds to the business value of a company. In order to keep them motivated and involved, companies are going an extra mile to reward them by giving them ESOPs / Sweat Equity.

 

It’s a win-win situation and also helps company to limit its fixed cost. The employees feel like entrepreneurs and gets rewarded multiple times once the company scales up and its valuation increases.

 

Companies those incentivizes their employee by issuing sweat equity gets the benefit of both the growth of its business along with the quality of work from their employees. From the employer’s point of view, sweat equity shares help to keep their employees faithful towards the company for a longer period, as shares are issued with the lock-in period of 3 years. However, sweat equity shares are taxable in the hands of employees.

 

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Ravi Garg                                    

Company Secretary                    

+91-7838204665,

csravi2014@gmail.com

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