Issue of sweat equity shares for a private company – Companies Act, 2013.

Issue of sweat equity shares for a private company used to be regulated by Section 79A and Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003 under Companies Act, 1956. Now the same is regulated by Section 54 and Chapter 4 under Companies Act, 2013.
“Sweat equity shares” means such equity shares, which 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.

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Essentials of Sweat Equity:

Eligibility for Sweat-
a) Permanent employee of the Company who has been working in India or outside India, for at least last 1 year
b) Director of Company-Whole time director or not
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.
Value Addition– Has been defined. It means actual or anticipated economic benefits derived or to be derived by Company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights.
Authorisation by shareholders– Yes, prior shareholders approval through special resolution is required.
Time limit for issuing Sweat: Allotment of sweat equity shares shall be made within 12 months from the date of passing special resolution.
Time Gap– There should be at least 1 year between the commenced of business and issue of such shares.
Valuation– Valuation of sweat shares and intellectual property rights(IPR)/know how/ value additions shall be done by Registered Valuer.
Notice of General Meeting– Critical elements of Valuation Report shall be sent along with the Notice. Particulars like class of shares, price, consideration, principal terms of conditions, employees to whom sweat is proposed is required to be mentioned in explanatory statement.
Limit on sweat equity: In a year, sweat shares shall not exceed 15% of existing paid up equity share capital or shares having issue value of Rs. 5,00,00,000, whichever is higher. However, it should not exceed 25% of paid up equity capital of Company at any time.
Mandatory lock-in period- 3 years from the date of allotment. The fact that the share certificates are under lock-in and the period of expiry of lock in shall be mentioned in prominent manner on share certificate.
Manner of treatment of sweat issued for other than cash in Books of accounts-
a) If non-cash consideration takes the form of a depreciable or amortizable asset- Should be carried to the balance sheet according to accounting standards; or
b) In other cases- Shall be expensed as provided in the accounting standards.
Accounting value of sweat equity
a) If sweat equity shares are not issued for acquisition of an asset- Value shall be treated as a form of compensation to the employee or the director in the financial statements of the Company.
b) If sweat equity shares are issued for 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
Rights/limitations/restrictions applicable on sweat equity shares- Shall rank pari passu with other equity shareholders.
Disclosure in Directors Report- Particulars like class of director or employee, class of shares, number of sweat equity shares, percentage of sweat equity shares in total post issued and paid up share capital, diluted Earnings Per Share, consideration received.
Register of Sweat Equity Shares– Details of sweat shares shall be mentioned in this Register. Shall be maintained at Registered Office or such other place as the Board may decide. Entries shall be authenticated by CS of the Company or by any other person authorized by Board.

Author : Geetika Chandel – a Company Secretary; manages Compliances at NovoJuris. She loves making graffitis.

Disclaimer: This is not a legal opinion and should not be construed as one. Please speak with your attorney for any advice.

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