ISSUUANCE OF EQUITY SHARES THROUGH SWEAT EQUITY
Introduction- What is sweat equity shares?
Sweat
equity shares refers to equity shares given to the company’s employees on favorable
terms, in recognition of their work. Sweat equity shares is one of the modes of
making share based payments to employees of the company. The issue of sweat
equity shares allows the company to retain the employees by rewarding them for
their services. Sweat equity shares rewards the beneficiaries by giving them
incentives in lieu of their contribution towards the development of the
company. Further, Sweat equity shares enables greater employee stake and
interest in the growth of an organization as it encourages the employees to
contribute more towards the company in which they feel they have a stake.
DEFINITION
As per section 2(88) of the Companies Act, 2013
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.
The Explanation to Rule 8 of the Companies (Share
Capital and Debentures) Rules, 2014 amended by the Companies (Share Capital and
Debentures) Second Amendment Rules, 2018, w.e.f. 7-5-2018 provides that for the
purposes of section 54 and this rule,
(i) Employee means—
(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.
(ii) Value additions means actual or anticipated
economic benefits derived or to be derived by the company from an expert and/or
a professional for providing know-how or making available rights in the nature
of intellectual property rights, by such person to whom sweat equity is being
issued for which the consideration is not paid or included in the normal
remuneration payable under the contract of employment, in the case of an
employee.
What are the conditions for
issuance of sweat equity shares?
According to
section 54, a company may issue sweat equity shares of a class of shares
already issued if
the following
conditions are fulfilled:—
i.
the issue of sweat equity
shares is authorised by a special resolution passed by the company in general
meeting;
ii.
the resolution specifies the
number of shares, current market price, consideration, if any, and the
class(es) of directors or employees to whom such equity shares are to be issued
iii.
Omitted by the Companies
(Amendment) Act, 2017, w.e.f. 7-5-2018, vide Notification No. SO 1833(E), dated
7-5-2018.
iv.
where the equity shares of the
company are listed on a recognised stock exchange, the sweat equity shares are
issued in accordance with the regulations made by the SEBI in this behalf and
if they are not so listed, the sweat equity shares are issued in accordance
with such rules as may be prescribed.
Important
Points while issuing Sweat Equity Shares:-
·
Every unlisted public company making any
offer for issue of any securities, before making such offer has dematerialized
of its securities held by its promoters, directors, key managerial personnel in
accordance with provisions of the Depositories Act, 1996 and regulations made there
under.
·
Who subscribes to any
securities of an unlisted public company (whether
by way of private placement or bonus shares or rights offer) on or after 2nd
October, 2018 shall ensure that all his existing securities are
held in dematerialized form before such
subscription.
·
Article of association authorizes for
issuance of sweat equity shares, if the article of association have no
provisions, then first alter the articles of association to include the
provisions for issue of sweat equity shares.
·
Whether authorized capital is sufficient
for issue of sweat equity shares, and if authorised capital is not enough, then
first alter the capital of company by altering of Capital Clause of the
Memorandum of Association.
·
Sweat equity shares in a year are issued
upto 15% of existing paid up capital or shares of issue value of Rs. 5 crores,
whichever is higher.
·
Sweat equity shares by a start-up company
are issued upto 50% of paid up capital upto 5 years from the date of
incorporation.
·
Sweat equity shares are issued to
directors or employees with a locked-in and non-transferable for a period of 3
years from the date of allotment.
·
The valuation of
intellectual property rights or of know how or the
value additions for which sweat
equity shares are to be issued, shall be carried out by a registered
valuer, who shall provide a proper report addressed to the Board of
directors with justification for such valuation.
·
The sweat equity
shares to be issued shall be valued at a price determined
by a registered valuer as the fair price giving justification
for such valuation.
·
Sweat equity shares issued to directors or
manager for consideration other than cash are treated as managerial
remuneration for the purposes of section 197 and section 198 of the Companies
Act, 2013.
Make following disclosures in the board of directors
report of the year in which sweat equity shares are issued:
·
the class of director or employee to whom
sweat equity shares were 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.
The provisions and procedures relating to issue of sweat equity
shares are as follows:
·
Convening Board Meeting of Company and passed the following
resolution.
o
Issuance of sweat equity shares.
o
Appointment of Registered Valuer.
o
Authorisation to Director/Company
Secretary to sign the documents.
o
Fixing day, date, time and venue for
calling general meeting.
o
Approving notice of general meeting for
passing special resolution for issuance of sweat equity shares.
·
Prepare draft minutes of the board meeting
and circulate, within a period of fifteen days from the date of conclusion of
that meeting, to all directors, by hand/speed post/ registered
post/courier/e-mail or by any recognised electronic means, for their
comment(s).
·
Convene general meeting and pass special
resolution for issue of sweat equity shares.
·
Prepare draft minutes of shareholders’
meeting and for finalization, send the draft minutes to the chairman of that
meeting.
·
File e–Form
MGT-14 with the Registrar of Companies along with attachments for
registering special resolution passed in the general
meeting.
·
Minutes of the shareholders’ meeting shall
be signed and dated by the chairman of that meeting.
Prepare notice of board meeting along with
draft resolution(s) to be passed in the board meeting.
o
Send notice of board meeting to all the
directors at least 7 days before the date of board meeting or in such manner as
prescribed under section 173(3) of the Companies Act, 2013 and clause 1 of the
Secretarial Standard-1.
o
Convene board meeting within 12 months of
passing of special resolution and to pass resolution for Allotment of shares.
o
Authorise to sign and issue the share
certificates and other documents, etc.
·
Prepare draft minutes of the board meeting
and circulate, within a period of fifteen days from the date of conclusion of
that meeting, to all directors, by hand/speed post/registered
post/courier/e-mail or by any recognised electronic means, for their
comment(s).
·
Minutes of the board meeting shall be
signed and dated by the chairman of that meeting or by the chairman of the next
meeting.
·
Prepare list of allottees for filing with
the Registrar of Companies.
·
File the e-Form PAS-3 along with
attachments with the Registrar of Companies within 30 days of allotment.
In
case of Private Limited Companies:
·
Prepare share certificate and get them
stamped.
·
Issue share certificate to the respective
allottees within two months from the date of allotment of shares as per section
46 of the Act and Rule 5 of the Companies (Share Capital and Debentures) Rules,
2014.
·
(Please follow procedure for e-stamping of
share certificates)
In
case of Public Limited Companies:
·
Issue letter of allotment to the allottees
and ask them to furnish their demat account details.
·
Prepare Corporate Excel Form in respect of
allotment of securities and submit the same to the Depository and to Registrar
to the issue of the company.
·
Receive confirmation from the Registrar to
the issue that it has credited securities in demat account of all the allottee
within 60 days of allotment.
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