Oct 20, 2017
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Shares and Debentures Rules, 2014: Sweat Equity Shares

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This article talks about Sweat Equity Shares. It also highlights on the rules related to the issue of sweat equity shares under shares and debentures rules, 2014.

Sweat equity shares

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.

Issue of Sweat Equity Shares under Shares and Debentures Rules, 2014

  1. A company other than a listed company, which is not required to comply with the Securities and Exchange Board of India Regulations on sweat equity, shall not issue sweat equity shares to its directors or employees at a discount or for consideration other than cash, for their providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called, unless the issue is authorized by a special resolution passed by the company in general meeting.

  1. The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall contain the following particulars, namely:-

  • the date of the Board meeting at which the proposal for issue of sweat equity shares thus approved;
  • the reasons or justification for the issue;
  • the class of shares under which sweat equity shares thus intended to issue;
  • the total number of shares to issue as sweat equity;
  • the class or classes of directors or employees to whom such equity shares to issue;
  • the principal terms and conditions on which sweat equity shares are to issue, including basis of valuation ;
  • the time period of association of such person with the company;
  • the names of the directors or employees to whom the sweat equity shares will issue and their relationship with the promoter or/and Key Managerial Personnel;
  • the price at which the sweat equity shares thus proposed to issue;
  • the consideration including consideration other than cash, if any to receive for the sweat equity;
  • the ceiling on managerial remuneration, if any, breached by issuance of such sweat equity and how thus proposed to dealt with;
  • a statement to the effect that the company shall conform to the applicable accounting standards; and
  • diluted Earning Per Share pursuant to the issue of sweat equity shares , calculated in accordance with the applicable accounting standards.
  1. The special resolution authorizing 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.

  1. The company shall not issue sweat equity shares for more than fifteen percent of the existing paid up equity share capital in a year or shares of the issue value of rupees five crores, 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.
  • Provided further that a startup company 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.
  1. The sweat equity shares issued to directors or employees shall thus locked in/non transferable for a period of three years from the date of allotment and the fact that the share certificates thus under lock-in and the period of expiry of lock in shall however stamped in bold or mentioned in any other prominent manner on the share certificate.

  2. The sweat equity shares thus issued shall valued at a price determined by a registered valuer as the fair price giving justification for such valuation.

  3. The valuation of intellectual property rights or of know how or value additions for which sweat equity shares considered to issue, shall thus carried out by a registered valuer, who shall provide a proper report addressed to the Board of directors with justification for such valuation.

  4. A copy of gist along with critical elements of the valuation report obtained under clause (6) and clause (7) shall sent to the shareholders with the notice of the general meeting.

  5. Where sweat equity shares thus 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 however treated in the following manner in the books of account of the company-

(a) where the non-cash consideration takes the form of a  amortizable asset, it shall thus carried to the                              balance sheet of the company in accordance with the accounting standards; or

(b) where clause (a) not applicable, it shall be expense as provided in the accounting standards.

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

  • the sweat equity shares issued to any director or manager; and
  • they issued for consideration other than cash, which does not take the form of an asset which can thus carried to the balance sheet of the company in accordance with the applicable accounting standards.
  1. In respect of sweat equity shares issued during an accounting period, the accounting value of sweat equity shares shall treated as a form of compensation to the employee or the director in the financial statements of the company, if the sweat equity shares thus not issued pursuant to acquisition of an asset.

  2. 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.

Explanation

For the purposes of this sub-rule, it hereby clarified that the Accounting value shall considered the fair value of the sweat equity shares as determined by a registered valuer under sub-rule (6)

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

  • the class of director or employee to whom sweat equity shares thus issued;
  • the class of shares issued as Sweat Equity Shares;
  • 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;
  • the reasons or justification for the issue;
  • the principal terms and conditions for issue of sweat equity shares, including pricing formula;
  • the total number of shares arising as a result of issue of sweat equity shares;
  • the percentage of the sweat equity shares of the total post issued and paid up share capital;
  • the consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares;
  • the diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.

(14)

  • The company shall maintain a Register of Sweat Equity Shares in Form No. SH.3and shall forthwith enter therein the particulars of Sweat Equity Shares issued under section 54.
  • The Register of Sweat Equity Shares shall maintained at the registered office of the company or such other place as the Board may decide.
  • The entries in the register shall authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.

 

 

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The Companies Act, 2013

Avani is a LL.B. student of New Law College. Classical use of language and adeptness with the written word make her treasure useful legal information. In her spare time, she writes prose and pursue an active interest in creative writing.

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