What are Sweat Equity Shares?
The Promoters and employees who contribute to the formation of the company may like to get compensated against their hard work (Sweat) in the form of equity either discounted price or consideration other than cash. This is what term as sweat equity. It helps the business retain its brilliant human resources and also raise funds without availing debt.
Definition as per section 2(88) of 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;
Providing technical, practical knowledge or skill to the company by an employee or director.
(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 of a holding company of the company;
‘Value additions’ means:
- actual or anticipated economic benefits derived or to be derived by the company from an expert 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
Section 54: Issue of Sweat Equity Shares
(1) Notwithstanding anything contained in section 53,
A company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely:—
(a) the issue is authorised by a Special Resolution passed by the company;
(b) 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;
(c) 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 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.
Compliance for the issue of Sweat Equity Shares by Unlisted Companies -Rule of 8 of Companies (share capital and debentures) Rules, 2014
(1) Issue at discount or for consideration other than cash to be approved by special resolution:
A company other than a listed company, which is not required to comply with the SEBI Regulations on sweat equity, shall not issue sweat equity shares to its directors or employees at a discount or or 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 authorised by a special resolution passed by the company in general meeting.
(2) Disclosure in explanatory statement: The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall contain the following particulars, namely:-
(a) the date of the BM at which the proposal for the issue of sweat equity shares was approved;
(b) the reasons or justification for the issue;
(c) the class of shares under which sweat equity shares are intended to be issued;
(d) the total number of shares to be issued as sweat equity;
(e) the class or classes of directors or employees to whom such equity shares are to be issued;
(f) the principal terms and conditions including basis of valuation ;
(g) the time period of association of such person with the company;
(h) the names of the directors or employees and their relationship with the promoter or/and Key Managerial Personnel;
(i) the price;
(j) the consideration including consideration other than cash
(k) the ceiling on managerial remuneration,
(l) a statement to the effect that the company shall conform to the applicable accounting standards; and
(m) diluted EPS pursuant to the issue of sweat equity shares, calculated in accordance with the applicable accounting standards.
(3) Allotment within 12 Months of Special Resolution-
The special resolution authorising the issue of sweat equity shares shall be valid for making the allotment within a period of not exceeding 12 months from the date of passing of the special resolution
(4) Maximum limit to issue Sweat Equity share
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
Provided that 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.
Provided further that a startup company may issue sweat equity shares up to 50% of its paid-up capital up to 10 years from the date of its incorporation or registration
(5) Lock-in period
The sweat equity shares issued to directors or employees shall be locked in/non-transferable for a period of 3 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.
(6) Valuation by Register Valuer
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.
(7) Valuation by IPR valuer
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.
(8) Valuation report to be sent to Shareholder
A copy of the gist along with critical elements of the valuation report obtained under clauses (6) and clause (7) shall be sent to the shareholders with the notice of the general meeting.
(9) Treatment of Non-cash consideration
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-
(a) 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
(b) where clause (a) is not applicable, it shall be expensed as provided in the accounting standards.
(10) Managerial Remuneration
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.-
(a) the sweat equity shares are issued to any director or manager; and
(b) they are issued for consideration other than cash, which does not take the form of an asset that can be carried to the balance sheet of the company in accordance with the applicable accounting standards.
(11) Treated as Compensation
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 the acquisition of an asset.
(12) Such Compensation in excess of the value of the asset
If the shares are issued pursuant to the 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 is hereby clarified that the Accounting value shall be the fair value of the sweat equity shares as determined by a registered valuer under sub-rule (6)
(13) Disclosure in the Directors’ Report:
The Board of Directors shall, inter alia, disclose in the Directors’ Report for the year in which such shares are issued, the following details of the issue of sweat equity shares namely:-
(a) the class of directors or employees to whom sweat equity shares were issued;
(b) the class of shares issued as Sweat Equity Shares;
(c) 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 per cent or more of the issued share capital;
(d) the reasons or justification for the issue;
(e) the principal terms and conditions for the issue of sweat equity shares, including pricing formula;
(f) the total number of shares arising as a result of the issue of sweat equity shares;
(g) the percentage of the sweat equity shares of the total post issued and paid-up share capital;
(h) the consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares;
(i) the diluted Earnings Per Share (EPS) pursuant to the issuance of sweat equity shares.
(14) Maintain a Register in Form SH-3
(a) The company shall maintain a Register of Sweat Equity Shares in Form No. SH.3 and shall forthwith enter therein the particulars of Sweat Equity Shares issued under section 54.
(b) The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide.
(c) The entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.
Section 54(2): The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank pari passu with other equity shareholders.
Section 53: Prohibition on Issue of Shares at Discount
(1) Except as provided in section 54, a company shall not issue shares at a discount.
(2) Any share issued by a company at a discount price shall be void.
(2A) Notwithstanding anything contained in sub-section (1) and (2),
A company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the RBI under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.
Contravention of section 53:
(3) Where any company fails to comply with the provisions:
♦ such company and every officer who is in default shall be liable to a penalty:
- extend to an amount equal to the amount raised through the issue of shares at a discount or
- 5 lakh rupees, whichever is less, and
♦ the company shall also be liable to refund all monies received
with interest at the rate of 12%. per annum from the date of issue of such shares to the persons to whom such shares have been issued.