Company Law procedures

Procedure to issue Sweat Equity Shares under Companies Act 2013

Pre-Conditions for the issuing Sweat Equity as prescribed under Companies (Shares and Debentures) Rules, 2014:

  1. The 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.
  2. 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. However the issuance of sweat equity shares in the Company shall not exceed 25% of the paid up capital of the company at any time.
  3. The sweat equity shares issued to directors or employees shall be locked in/non transferable 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.
  4. 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.
  5. The valuation of intellectual property rights or of know how or 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.
  6. 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 –
  7. 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
  8. where (a) above is not applicable, it shall be expensed as provided in the accounting standards.
  9. 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 –
  10. the sweat equity shares are issued to any director or manager; and
  11. 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.
  12. 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.
  13. 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.
  14. The company on issue and allotment of sweat equity shall inter allia disclose in its Boards Report every year the following details:
  15. the class of director or employee to whom sweat equity shares were issued;
  16. the class of shares issued as Sweat Equity Shares;
  17. 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;
  18. the principal terms and conditions for issue of sweat equity shares, including pricing formula;
  19. the total number of shares arising as a result of issue of sweat equity shares;
  20. the percentage of the sweat equity shares of the total post issued and paid up share capital;
  21. the consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares;
  22. the diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.

Steps for the Issue:

The issue should be authorised by a special resolution passed at the general meeting held by the company.

  1. Director to call meeting of Board of Directors with atleast 7 days’ notice to propose and consider the issue of sweat equity shares and issue notice for the general meeting;
  2. Unlisted public companies shall issue notice for the general meeting atleast 21 days before the meeting which may be called at a shorter notice with the consent of 95% of the Shareholders, whereas the private companies subject to the exemption notification issued by MCA on 05.06.2015 may issue notice pursuant to the provisions of the Articles of Association;
  1. The explanatory statement to the notice pursuant to the provisions of Section 102 shall contain the following particulars namely:
  • the date of the Board meeting at which the proposal for issue of sweat equity shares was approved;
  • the reasons or justification for the issue;
  • the class of shares under which sweat equity shares are intended to be issued;
  • the total number of shares to be issued as sweat equity;
  • the class or classes of directors or employees to whom such equity shares are to be issued;
  • the principal terms and conditions on which sweat equity shares are to be issued, 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 be issued and their relationship with the promoter or/and Key Managerial Personnel;
  • the price at which the sweat equity shares are proposed to be issued;
  • the consideration including consideration other than cash, if any to be received for the sweat equity;
  • the ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity and how it is proposed to be 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;
  • and a copy of the gist along with the critical elements of valuation report obtained with from the registered valuer towards the valuation of the shares for determining the price of shares at which sweat equity shall be issued and the valuation report for issuing the sweat equity against the intellectual property rights or know how or value additions shall be sent with the notice of the general meeting.
  1. At the General meeting the members shall pass the special resolution for issue of sweat equity shares which shall mandatorily specify the number of shares, the current market price if the shares of the company are listed, consideration of the issue, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;
  2. On passing of the special resolution file the resolution with MCA in Form MGT-14 within 30 days of passing the same for intimating the registrar for passing the resolution;
  3. Once the resolution is filed with the registrar in Form MGT-14, on approval of the same the Board shall call for the Board meeting with due notice to allot the sweat equity;
  4. Once the resolution is passed at the meeting of the Board for allotment of the shares the company shall file Form PAS-3 within 30 days of passing of the Board resolution for allotting of sweat equity;
  5. On allotment the company shall maintain the Register of Sweat Equity in Form SH-3 and enter the particulars of Sweat Equity Shares issued under this section and shall be maintained at the registered office of the company or such other places as the Board may decide;
  6. The entries in the register shall be authenticated by the Company Secretary of the company or such other person as authorised by the Board of Directors of the Company.

Here under Rule 8 of the sub rule (12) of the Companies (Shares and Debentures) Rules, 2014 it has been clarified that the Accounting value shall be fair value of sweat equity shares as determined by the registered valuer under sub rule (6) of the above rules.

In the conditions and procedures for the issue of sweat equity shares there have been mentioned for the valuation report from Registered Valuer, but as of now the panel oaf Registered Valuer has not been constituted yet and hence the valuation report can be obtained from the Chartered Accountant Practicing in India having experience of 10 years or more as per the notification issued by the Ministry of Corporate Affairs vide notification G.S.R. 413.(E) as published in e-gazette on 18.06.2014.

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