Issue sweat equity shares to retain employees

Last Modified: September 12, 2019 | 7 min read READ

LexStart Team

What is Sweat Equity Shares?

 Sweat equity shares refer to equity shares given to the company’s employees on favorable terms, in recognition of their work.  Sweat equity shares are one of the modes of making share-based payments to employees of the company. The issue of sweat equity shares allows the company to retain the employees by rewarding them for their services. Sweat equity shares reward the beneficiaries by giving them incentives in lieu of their contribution to the development of the company. Further, Sweat equity shares enable greater employee stake and interest in the growth of an organization as it encourages the employees to contribute more towards the company in which they feel they have a stake.

As per Section 2(88) of the Companies Act, 2013 “sweat equity shares” means 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.

 

Definition of Employee for the purpose of the issue of Sweat Equity Shares?

As per Explanation (i) to Rule 8(1) of the “Employee” means:

(a) a permanent employee of the company who has been working in India or outside India, for at least last one year; 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.

 

What is Value addition for the purpose of the issue of Sweat Equity Shares?

As per Explanation (ii) to Rule 8(1) of the “Value Addition” 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.

 

What are the conditions to be fulfilled for the issue of Sweat Equity Shares?

1) Not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business;

2) The issue is authorized by a special resolution passed by the company;

3) 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;

4) The special resolution authorizing 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.

5) The sweat equity shares issued to directors or employees shall be locked in/nontransferable 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.

6) Where the equity shares of the company are listed on a recognized stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board on this behalf and if they are not so listed, the sweat equity shares are issued in accordance with the.

7) 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.

8) The issuance of sweat equity shares in the Company shall not exceed twenty-five percent, of the paid-up equity capital of the Company at any time.

A startup company, as defined in notification number GSR 180(E) dated 17th February 2016  issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, may issue sweat equity shares not exceeding fifty percent of its paid-up capital upto five years from the date of its incorporation or registration.

What is the Procedure to be followed for the Issue of Sweat Equity Shares as per Companies Act, 2013?

For the issue of sweat equity shares, the following procedure needs to be followed:

  • The Company has to take a valuation certificate from the Registered Valuer for determining the value of shares.

 

  • Convene and hold a board meeting to consider the proposal of issue of sweat equity shares and to fix up the date, time, place, and agenda for general meetings and to pass a special resolution for the same.

 

  • Issue notices in writing to Shareholders for general meeting along with the explanatory statement. The explanatory statement to be annexed to the notice for the general meeting pursuant to section 102 of the Act must contain the following particulars:

(a) the date of the Board meeting at which the proposal for 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 on which sweat equity shares are  to be issued, including the basis of valuation;

(g) the time period of association of such person with the company;

(h) 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;

(i) the price  at which  the sweat equity shares are  proposed to be issued;

(j) the consideration including consideration other than cash, if any to be received for the sweat equity;

(k) the ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity and how  it is proposed to be dealt with;

(l) a statement to the effect that the company shall  conform to the applicable accounting standards; and

(m) diluted Earning Per Share pursuant to the issue of sweat equity shares, calculated in accordance with the applicable accounting standards.

n) Convene an Extra-General Meeting and pass a special resolution

o) File the resolution with MCA in Form  No. MGT-14 within 30 days of passing the special resolution;

p) Call the Board Meeting and allot sweat equity shares to the Employees in the meeting.

q) File Form No. PAS-3 within 30 days of passing of the Board resolution for allotting sweat equity shares;

r) The Company has to pay the Stamp duty on the issuance of share certificate as per the prevailing relevant state law;

s) The Company has to issue Share Certificates to the allottees within 2 months of allotment.

t) 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.

u) 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.

 

What are the Disclosures in the Directors Report in respect of Sweat Equity Shares?

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:‑

1) the class  of director or employee to whom sweat equity shares were issued;

2) the class  of shares issued as Sweat Equity Shares;

3) 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;

4) the reasons or justification for the issue;

5) the principal terms and conditions for issue of sweat equity shares, including pricing formula;

6) the total number of shares arising as a result of the issue of sweat equity shares; the percentage of the sweat equity shares of the total post issued and paid-up share capital;

7) the consideration (including consideration other than cash)  received or benefit accrued to the company from the issue of sweat equity share.

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