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Sweat Equity Shares under Companies Act, 2013

July 19, 2016     by Kamini Goyal

Definition of Sweat Equity Share [Section 2(88)]: –

  • Equity Shares which are issued to directors or employees;
  • Issued at a discount or for consideration, other than cash;
  • For providing their know-how or making available rights in the nature of IPR or value additions.

Applicable Provisions: –

  • Section 54 of the Companies Act 2013
  • Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014

 

Section 54

 

Section 54(1) Issue of shares Only a class of shares already issued.
Section 54 (1) (a) Shareholders’ Approval By Special Resolution.

Note: – SR shall be valid for a period of not more than 12 months from the date of passing of SR [Rule 8(3)]

Section 54 (1) (b) Contents of SR
  • Number of shares
  • Current Market Price
  • Consideration, if any
  • Class of Directors or employees covered.
Section 54 (1) (c) Time Limit Can be issued only after one year from the date of commencement of business
Section 54 (1) (d) Listed shares SEBI regulations to be followed.

 

Rule 8 of Companies (Share Capital and Debentures) Rules, 2014

Employee means: –

 

A Employee Permanent employee of the Company, working in India or outside, for at least one year.
B Director Whether a WTD or not
C Employee or a Director as defined in (A) or (B) Of a subsidiary, in India or outside India, or of a holding company of the Company

 

Value Addition: –

 Benefit derived or to be derived from an expert or professional for providing: –

  • Know-how or;
  • Making rights available in the nature of IPR

Consideration: –

  • Is not paid or;
  • Included in the normal remuneration payable under the contract of employment.

Disclosures in Explanatory Statement [Rule 8(2)]: –

  • Date of Board Meeting;
  • Justification for the issue;
  • Class of shares/total no. of shares to be issued;
  • Class of Directors or employees and their names along with their relationship with the promoter or/and KMP;
  • Principal T&C, basis of valuation of shares;
  • Time period of association of such person with Company;
  • Proposed price;
  • Consideration, if any, to be received;
  • The ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity and how it is proposed to be dealt with;
  • Statement to the effect that the Company shall conform to the applicable AS;
  • Diluted EPS calculated in accordance with AS.

 

[Rule 8(4)] Limit on Sweat equity shares

 

Issue of sweat equity shares in a year shall not exceed: –

  • 15% of the existing PSC or
  • Shares of issue value of Rs. 5 crores, whoever is higher.

Provided that Issue of sweat equity shares should not exceed 25% of the paid up equity capital of the Company at any time.

[Rule 8(5)] Lock in Period Lock in period/ Non transferable period- three years from the date of allotment.

The fact that the share certificates are under lock-in and the period of expiry of lock in shall be mentioned in prominent manner on share certificate.

[Rule 8(6)] Valuation of sweat equity shares Price to be determined by Registered Valuer as the fair price.
[Rule 8(7) & 8] Valuation of IPR/Know-how/Value Addition Shall be carried out by Registered Valuer.

He shall provide a report to Directors with justification.

Copy of gist to be send to the shareholders.

Rule 8(9) Issued for non cash consideration
  • Valuation report to be obtained from registered valuer,
  • If it is depreciable or amortizable asset, it shall be carried to the balance sheet; or
  • If above point is not applicable, it shall be expended as provided in accounting standard.
 [Rule 8(10)] Amount of sweat equity shares shall be treated as part of managerial remuneration for the purpose of section197 and 198, if following conditions are fulfilled: –
  • If issued to any director or manager and
  • If issued for consideration other than cash, it does not take the form of an asset which can be carried to the B/sheet in accordance with applicable AS.
Rule 8(12) Issued pursuant to acquisition of asset
  • Value to be determined by valuer.
Rule 8(13) Disclosure in Directors Report Particulars like class of director or employee, class of shares, number of sweat equity shares, percentage of sweat equity shares in total post issued and paid up share capital, diluted Earnings Per Share, consideration received.
Rule 8(14)  Register of Sweat Equity Shares
  • Details of sweat shares shall be maintained in a Register (Form No. SH.3).
  • Shall be maintained at Registered Office or such other place as the Board may decide.
  • Entries shall be authenticated by CS of the Company or by any other person authorized by Board.

 

 


 

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