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
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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.
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Reference to entry in register of members
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Name of the allottee
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Status of the allottee – whether director or
employee
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Date of passing of Board resolution
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1
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2
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3
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4
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5
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Date of the special resolution authorizing the
issue of sweat equity shares
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Date of issue of sweat equity shares
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Number of sweat equity shares issued
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Certificate No. / Folio No.
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6
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7
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8
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9
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Face value of
the share
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Price at which the shares are issued
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Amount to be treated as paid up
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Total consideration paid, if any, by the employee
/ director
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Consideration received in cash
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Particulars of consideration other than cash
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10
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11
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12
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13
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14
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Lock in period
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the date of expiry of lock-in- period
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Remarks, if any
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Date of Joining
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Fair value obtained by Valuer
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Basis of Valuation
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Name of Valuer
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15
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16
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17
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5
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12
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13
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14
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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.
Knowledge increases by sharing but not by saving !
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Ravi Garg
Company
Secretary
+91-7838204665,
csravi2014@gmail.com
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