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Issue of Sweat Equity Shares as per Companies Act, 2013

Sweat equity shares are issued to employees or directors of the company in order to reward them. Companies issuing such shares need to comply with provisions of section 54 of the Companies Act 2013 and rules made thereunder. Further, the listed companies shall comply with the relevant SEBI (Securities and Exchange Board of India) Regulations.

Definition of sweat equity shares

As per section 2(88) of the Act “sweat equity shares” means such equity shares 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.

Meaning of Employee and Director

Directors or employees to whom sweat equity shares are to be issued have been defined under provisions of the Companies Rules 2014, as under:

(i) A permanent employee of the company who has been working in India or outside India.

(ii) A director of the company (whether a whole-time director or not).

(iii) An employee or a director of the subsidiary company, in India or outside India.

(iv) An employee or a director of the holding company.

Conditions for issue of sweat equity shares

According to section 54 of the Companies Act, a company may issue sweat equity shares after the following conditions are met:

(i) the issue is authorised by a special resolution. Note, the special resolution authorising the issue shall be valid for a period of 12 months from the date of passing the resolution.

(ii) the resolution specifies the number of shares, the current market price, consideration if any, and the class or classes of directors or employees to whom such equity shares are to be issued;

(iv) If the equity shares of the company are listed on a recognised stock exchange, the listed companies shall comply with the SEBI (Securities and Exchange Board of India) Regulations also.

Limit for issuance of sweat equity shares

The company shall not issue sweat equity shares for more than 15% of the existing paid-up equity share capital in a year or shares of the issue value of Rs. 5 crores, whichever is higher. However, the issuance of sweat equity shares in the company shall not exceed 25% of the paid-up equity capital of the company at any time.

Note, In case of Start-up Company the sweat equity share should not increase more than 50% of its paid-up capital up to the period of 5 years from the date of its incorporation.

Compliances for the issue of sweat equity shares under Company Law

Fair price: The sweat equity shares to be issued shall be valued at a fair price as determined by a registered valuer. The valuer shall also provide a report giving justification for valuation.

Lock-in period of 3 years: The sweat equity shares issued to directors or employees shall not be transferable for a period of 3 years from the date of allotment.

Maintenance of register: The company shall maintain a register of sweat equity shares in Form No. SH-3.

  • Particulars of sweat equity shares issued shall be entered in the register.
  • The register shall be maintained at the registered office of the company or such other place as the Board of Directors may decide.
  • The entries in the register shall be authenticated by the company secretary of the company or by any other person authorised by the Board of Directors for the purpose.

Disclosure in Board Report: The following details of the sweat equity issue shall be disclosed in Board's Report for the year in which the issue is made:

  • Class of director or employee to whom sweat equity shares were issued
  • Class of shares issued as sweat equity shares
  • 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
  • Reasons or justification for the issue
  • Principal terms and conditions for issue including pricing formula
  • Total number of shares arising as a result of the issue
  • Percentage of the sweat equity shares of the total post issued and paid-up share capital
  • Consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares
  • Diluted Earnings Per Share (EPS) pursuant to the issuance of sweat equity shares

Related

Form No. SH-3 - Register of Sweat Equity Shares


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TaxGyata Team

TaxGyata Team