Tag Archives: Companies Act 2013

Issue of Sweat Equity Shares –Old Wine in a New Bottle ?

 | Practicing Company Secretary,

I am a Practicing Company Secretary with over 30 years of experience. I have been rendering professional services in the areas of Company Law, Company Secretarial Practice, Corporate Governance, Administration, Management etc., I have designed and developed Csmart – a Company Secretarial Software (http://csmart.co.in/) aimed at making the life of a Company Secretary and anyone else practicing Corporate Law easier. I can be contacted at ramks17@gmail.com

 

 

SECTION 54 of the Companies Act, 2013 deals with the Issue of Sweat Equity Shares. Most of the provisions have been copied from Section 79A of the Companies Act, 1956. The New Act has maintained the same percentage and quantum upto which Sweat Equity could be issued. ‘The Sweat Equity Issue’ has become more transparent now. There was no definition of Sweat Equity under the old Act. Now Section 2(88) defines Sweat Equity as 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.

I would like to deal with the following points with regard to issue of Sweat Equity Shares under the new Companies Act, 2013:
a. Eligibility time to Issue Sweat Equity
b. Conditions to be fulfilled to issue Sweat Equity
c. Method under which Sweat Equity could be issued
d. Eligibility norms of issuing Sweat Equity
e. Other compliance with respect to issue of Sweat equity

a. ELIGIBILITY TIME TO ISSUE SWEAT EQUITY

One year from the date of commencement of Business should have elapsed for a Company to issue Sweat Equity shares.

b.CONDITIONS TO BE FULFILLED TO ISSUE SWEAT EQUITY

  1. The issue should be authorized by a Special resolution in a general meeting.
  2. The resolution should specify
    i. the number of shares
    ii. the current market value
    iii. consideration if any
    iv. the class of directors to whom shares are issued
    v. the class of employees to whom the shares are to be issued
  3. the issue conforms to the rules prescribed
  4. if it is listed, it has to conform to SEBI rules
  5. 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 and the holders of such shares shall rank pari pasu with other equity shareholders.

  c.METHOD UNDER WHICH SWEAT EQUITY COULD BE ISSUED

The Sweat Equity Shares could be issued

i. at a discount
ii. for consideration other than cash
iii. for providing technical knowhow
iv. making available the rights to intellectual property rights
v. value additions by what ever name called

d.ELIGIBILITY NORMS FOR ISSUING SWEAT EQUITY

Not more than 12 months from the dating of passing the special resolution should have elapsed for issuing the sweat equity.

i. Not more than 15% of the issued capital or issue value of Rs.5 crores which ever is higher shall be issued in a year.
ii. The sweat equity issue shall not exceed 25% of the total paid up equity capital
iii. Sweat equity shares issued to employees or directors should have a lock in period of three years and shall should be stamped in bold letters on the share certificates
iv. The sweat equity shares to be issued shall be valued at a price determined by the registered valuer who shall give a proper valuation report to the Board with justification of such valuation
v. The valuation of intellectual property rights or know how or value addition for which sweat equity shares are issued shall be carried out by the registered valuer and shall give a report to the Board of Directors giving justification for such valuation.
vi. A copy of the critical elements of the valuation report obtained under clause (iv) and (v ) should be sent along with the notice of General Meeting to all the shareholders.

e. OTHER COMPLIANCE IN RESPECT OF ISSUE OF SWEAT EQUITY

(a) PARTICULARS TO BE MENTIONED IN THE EXPLANATORY STATEMENT

The following particulars have to be mentioned in the Explanatory Statement in addition to the information to be provided under Section 102 of the Companies Act, 2013.
i. the date of Board meeting on which the proposal was approved
ii. the reasons or justification of the issue
iii. the class of shares under which the sweat equity are intended to be issued
iv. the total no of shares to be issued
v. the class or classes of shares to be issued to the directors or employees
vi. Principal terms and conditions to be issued including basis of valuation
vii. time period of association of such person (beneficiary) with the company
viii. the names of the directors or employees to whom the sweat shares to be issued and their relationship with the promoters and key management personnel.
ix. the price at which the sweat equity shares are to be issued
x. the consideration including the consideration other than cash if any to be received for the sweat equity
xi. would the ceiling of managerial remuneration be breached by issuance of such equity and how it is proposed to deal with
xii. the statement to the effect that the Company shall conform to the applicable accounting standards
xiii. the diluted earning per share pursuant to the issue of sweat equity calculated asper the applicable accounting standards

(b) PARTICULARS TO BE MENTIONED IN THE BOARD REPORT

(i) the class of Directors or employees to whom sweat equity shares are issued.
(ii) Class of shares issued as Sweat shares
(iii) No of sweat shares issued to Directors, relatives, key managerial personnel or other employees showing separately the number of shares issued to them if any for consideration other than cash and the individual names of the allottees holding 1% or more of the issued capital.
(iv) The reason/justification of the issue
(v) Principal terms and conditions to be issued including pricing formula
(vi) the total no of shares arising out of issue of sweat equity v. the class of shares to be issued to the directors or employees
(vii) Percentage of sweat equity shares of the total post issued and paid up capital
(viii) Consideration received (including consideration other than cash)received or benefit accrued to the Company from the issue of sweat equity
(ix) Diluted earning per share pursuant to the issue of sweat equity

(c). SWEAT EQUITY ACCOUNTING TREATMENT

Where Sweat Equity Shares are issued for a non cash consideration on the basis of valuation report obtained from the registered valuer, such non cash transaction shall be treated in the following manner in the books of Accounts of the Company

i Where a non cash transaction takes the form of a depreciable asset or amortizable asset it shall be carried to the Balance Sheet in accordance with the Accounting Standards
ii If Clause (i) is not applicable, it shall be expensed off as provided in the Accounting standards.
iii The amount of sweat equity shall be treated as a part of Managerial remuneration for the purpose of Section 197 and 198, if the following conditions are fulfilled.
a. If the sweat equity is issued to manager or a Director for consideration other than cash and has not been carried to Balance Sheet as an Asset in accordance with the Accounting Standards.
b. In respect of sweat equity shares issued in an accounting year, the accounting value of the sweat equity shares shall be treated as a form of compensation to the employee or the Director in the financial statements of the Company in respect of shares not issued pursuant to acquisition of an asset.
c. 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 asper 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.

(d). REGISTER OF SWEAT EQUITY

The Company shall maintain a Sweat Equity Register in Form SH.3. The Register could be maintained either at the registered office of the Company or such other place as the Board may decide. The entries in the Register should be authenticated either by the Secretary or any other person duly authorized by the Board.

(e). COMPLAINCE BY LISTED COMPANIES

In case of listed companies, the Sweat Equity Issue shall be regulated by the Securities And Exchange Board of India (SEBI) and shall be made in accordance with the regulations made by SEBI in this regard.

Loopholes to be plugged and the Clarifications to be issued from the Government on issue of Sweat Equity

  1. The Act is soft on Directors and harsh on employees. Employee should have a minimum one year employment in order to be eligible for Sweat Equity Shares. The Act also says that one year should lapse from the date of commencement of Business in order to issue Sweat Equity by the Company.. It means only Promoter Directors become eligible immediately as the Company would take time to recruit employees.
  2. There is no method to find the Date of commencement of business. As no certificate is issued by the Registrar of Companies as was done earlier under Section 149 of the Companies Act, 1956. We have to take the SRN date of E Forms INC.21 and INC.22 filed post incorporation as date of commencement of business.
  3. If an employee not completing one year of service could be accommodated as a Director for a brief period in order to be eligible for Sweat Equity.
  4. The Register could be maintained through the Electronic Mode but should be authenticated by the Secretary or an Authorised Signatory duly authorized by the Board. How do we affix the digital signature on a Register ?…any software tool required to fix this problem or do we have to maintain the hard copy of the Register ? Which one the investigating officer consider as proof of compliance … the soft copy or the hard copy? The final rules should give some clarity on these issues.