Understanding the basics of Sweat Equity Shares by Debarjita Bhattacharya

1. Introduction:

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

In simple terms, sweat equity shares are those which are produced to the employees and directors of the company who provides value to the company by their expert knowledge and contribution in their respective field of work. It is given to the employees or directors at a discount or for consideration other than cash or sometimes even for free even for free.

Usually, a company produces sweat equity shares:

1. To motivate its employees and directors to work hard for the growth of the company.
2. To value their technical knowledge in the field of business

• For their expertise in making available rights in the Intellectual Property Rights

1. And to appreciate their value addition to the company by gaining or to be gained actual or anticipated economic benefits.

2.Who can be allotted sweat equity shares?

According to the Explanation of Rule 8(1) of Companies (Share Capital and Debentures) Rules 2014, sweat equity shares can be issued to:

1. a permanent employee of the company,
2. a director of the company or
3. an employee or a director of a subsidiary or holding company

3.Which laws govern the issue of Sweat Equity shares?

1. The issuance of sweat equity shares is governed by Section 54 of the Companies act 2013 or previously the Companies Act 1956.
2. In case of a listed company, where the shares of the company are listed on a recognized stock exchange, the company shall issue sweat equity shares following the regulations made by Securities and Exchange Board of India in this behalf.
3. In case of an unlisted company, where the shares of a company are not listed in any recognized stock exchange, such companies shall issue sweat equity shares complying with rules made by the Central Government i.e., Companies (Share Capital and Debentures) Rules,2014.

4.Conditions for the issue of Sweat Equity Shares:

Section 54(1) of the Companies Act 2013 states that a company can issue sweat equity shares if the following conditions are satisfied:

1. the issue of such kind of shares are authorized to the company by the passing of special resolution in the general meeting of the company
2. the resolution must contain the following specifications:
3. number of shares to be allotted,
4. current market price of the shares,
5. considerations if any, and
6. the class or classes of directors or employees to whom such allocation shall be made.

Rule 8 of the Companies (Share Capital and Debentures) Rules 2014 also states the conditions for the issue of sweat equity shares:

1. Rule 8(1) prescribes that an unlisted company shall not issue sweat equity shares unless the issue is authorized by a special resolution passed by the company in a general meeting.
2. Rule 8(2) states that an explanatory statement must be annexed to the notice of the general meeting of the company. The explanatory statement shall contain all the particulars related to the issue of sweat equity shares such as the date of the Board Meeting at which the proposal for issue of shares was approved, the reason for such issue, total number of shares to be issued etc.
3. Rule 8(3) provides the time limit. It says that the allotment of shares must be made within 12months from the date of passing of special resolution.
4. Rule 8(4) states that a company shall issue sweat equity shares up to 15% of existing paid up equity share capital of the company in a year or up to Rs.5crore, whichever is higher.
5. Rule 8(5) laid down the Lock-in period which states that the shares issued shall be locked for a period of three years from the date of allotment.
6. Rule 8(6) and Rule 8(7) provides the valuation aspect of the sweat equity shares. The valuation of the sweat equity shares shall be determined by a registered valuer and justification of such valuation shall also be provided.
7. Rule 8(8) directs to send the valuation report to the shareholders along with the notice of the general meeting.
8. Rule 8(9) prescribes the issue of sweat equity shares for non-cash consideration on the basis of valuation by a registered valuer.

5. Disclosure of the details of Sweat Equity Shares to the Board’s Report:

According to Rule 8(13) the details of the issuance of Sweat Equity Shares shall be disclosed in the Board’s report of the company

6.Maintenance of register:

Rule 8(14) that the company shall maintain a Register of Sweat Equity Shares in Form No. SH.3. The register shall be kept at the registered office of the company or such other place as the Board may decide.

7.Conclusion:

Therefore, a company can issue sweat equity shares to its employees or directors or both for their technical know-how or value addition to the company at a discounted rate or without any cost by passing special resolution at the general meeting of the company as per the rules of Companies (Share Capital and Debentures) Rules 2014.