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Issue of Sweat Equity Shares: Requirements, Limitations, Pricing & Procedure

This article will concentrate on the various aspects involved in issue of sweat equity shares, such as the procedure, limitations and pricing.

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issue of sweat equity shares

Issue of Sweat Equity Shares

As per section 54 under the Companies Act, 2013  the company can offer the shares of its equity to Directors or employees at a reduced price or for an amount other than cash, in exchange for knowledge or to grant rights of intellectual property rights, under any name. Issue of Sweat equity shares are a reward to employees i.e.

  • The employee of the business that has worked for the company in India and/or Outside India, (Here the employee is a reference on the permanently employed employee),
  • Director of the company (A director may be a full-time director, (or not).

Furthermore, it can also include employees or directors as defined above for subsidiary companies, either located in India or outside of India or of a holding company of the company.

They are generally kinds of shares awarded to directors and employees of the business who contribute their expertise and know-how, which includes technical expertise through the distribution of stocks or other types of equity within a company. 

Equity shares that are swathed in sweat are given to directors and employees, to help them stay active and committed to the business.

Requirements for the issue of Sweat Equity shares

resolution requirement for the issue of sweat equity shares

The following criteria are necessary to meet, to issue of sweat equity shares:

  • The shares that are deemed to be sweat equity may be issued within one year from the date of inception of the business.
  • It has to be approved by the passing of a particular resolution by the company at the annual meeting.

The resolution should define the-

  1. Number of shares
  2. Price and consideration of the current market price,
  3. Directors’ classes or classes as well as employees whose equity shares are to be distributed.
  • If it is a listed Company that shares are traded on a reputable stock exchange. A company is expected to adhere to these SEBI regulations that are issued in this regard by the Securities and Exchange Board of India.
  • In the case of an Unlisted Company, where the shares are not listed, they will issue shares of this kind according to the rules adopted on behalf of the Central Government.
  • At the general meeting, the resolution adopted to authorize the issuance of sweat equity shares will be in effect for allotment in a time period not exceeding 12 months from the date of approving an extraordinary resolution.
  • A lock-in period of three years starting from when the shares were allotted. shares. The time of lock-in should be stamped in the bold font or written on the certificate of shares prominently. 

Limitations on the issue of Sweat equity shares

The company will issue these shares in exchange for:

  1. Amount not exceeding 15% percent of capital for equity shares within a calendar year or
  2. The share issue is worth 5 crores rupees or more, whichever is greater.

Furthermore, the issuance of sweat equity shares within the Company must not be more than twenty percent of the equity capital of the corporation at any point in time.

Note in the cases of start-up companies, the Issue of Sweat equity shares cannot exceed 50% of the capital paid up for five years from the date of incorporation.

Pricing of the Sweat Equity Shares

To determine the fair cost and justification for the valuation, the value of sweat equity will be assessed at a rate set by an accredited valuer. 

The registered valuer will submit a complete report to the directors of the company, along with the justification of the value. 

The registered valuer must provide the summary and the key details of the valuation report. The report is required to send it to shareholders in conjunction together with the notice of the general meeting.

Procedure for the issue of Sweat Equity Shares

  • To conduct the board Meeting to consider issues related to shares, and in addition, to publish an invitation to General Meeting.
  • Call a Board meeting to approve the issue of Sweat Equity shares and then submit the form PAS-3 along with ROC
  • After the Board resolution, it is now time to hold the General Assembly to adopt the special resolution, which will be specific the following:
  • The shares number,
  • If the shares are traded at the current market prices,
  • Consideration of issue, if any, and the class of employees or directors whom the shares are issued

A statement of explanation must be attached to the notice of the General Meeting and must contain the following information:

  1. The date when it was that Board Resolution was approved to issue shares.
  2. Justifications or reasons for the issue of equity shares in Sweat and the category of shares in the rules under which these shares are to be distributed.
  3. A total amount of shares that will be issued, along with the description of the class or classes of directors or employees who equity shares are issued.
  4. Conditions and criteria for which the shares are issued.
  5. The basis of valuation.
  6. The time of employment of the person (i.e. Director and employee) with the company with the name under which the shares of sweat equity belong.
  7. Pricing of the shares, which are planned for issue.
  8. Consideration to be paid for the sweat equity in addition to any other consideration than cash in the event of there is any.
  9. To meet the relevant accounting guidelines.
  • Make the special resolution available in MGT-14 form.
  • The company must disclose all details about the process of releasing this kind of shares in the Board report.
  • Maintaining the register for the issue of Sweat Equity Shares i.e. after allotting an entry the same on the Register.

Various forms for the allotment of shares in sweat equity

The process mentioned above is mainly based on two kinds of forms.

MGT 14 is due to be filed within 30 days, and PAS-3 must be filed within thirty days after the day of allotment of shares at the board meeting.

Penalties in the event of non-compliance

If the directors and the company fail to comply with the rules concerning the share of sweat equity the company could be penalized. There aren’t any specific penalties, the general provisions for punishment will apply.

Reasons why Sweat Equity shares are issued by companies

The companies issue shares of sweat equity due to one of the reasons listed below:

  • It gives the business the to draw in and retain employees by rewarding their contributions.
  • Sweat equity is a direct allotment of shares at a discount.
  • It’s a method of reward that is more than any sitting fee to independent directors who, through impressive actions help the company grow to an even higher level.

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Conclusion

Different types of businesses issue of Sweat Equity shares such as one person Company, Private or Public Companies, Section 8 Companies, etc. If you’re looking for additional information about the same you can contact Odint Consultancy.

Penalties for breaches related to Share Certificate. Each officer who defaults from that company will be punished with an amount of at least 10000 rupees. It can be increased up to 1 lakh rupees.

FAQ’s

Equity shares that are given to directors and employees will be locked in for a period that is three years from the date they were allotted.

The company may issue shares in sweat equity in the amount of the higher of two 15 percent of its capital share capital that is currently paid up) or. INR 5 Crore.

Employees or directors receive sweat equity shares in exchange for contributing any intellectual property rights, know-how, or value enhancements to the business. The ESOP is given to the employees in the form of an option to buy the shares at a certain price at a later date.

The following method of the buyback is possible: proportional buybacks of shares from current shareholders. repurchase of shares on a public market. Sweat equity or the buyback of securities provided to employees under an ESOP

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