Issue of Sweat Equity Shares - All you need to know

Sweat Equity shares are the shares issued by a company in the form of reward to its directors or employees. Shares are issued at discount or Consideration other than cash for providing knowhow or making any value additions which generates synergy to the company. Sweat Equity shares is the reward given to the directors or employees for their hardwork and dedication towards the Company.

• It is issued to Directors or Employees or Promoters of the company, or of subsidiary company or of holding company of the company
• It is issued at discount price or other than cash
•  It issued for providing value addition like ‘Know how, Intellectual property rights, or valuable contribution’ which has help company to earn profits

• Governing Acts and Rules

1. Rule 8 of Companies(Share Capital and Debentures) Rules 2014
2. Section 54 of Companies Act 2013
3. SEBI (Issue of Sweat Equity Shares) Regulations, 2002., in addition to above acts and rules if it is a Listed Company

• Conditions and Checklist for issue of Sweat Equity Share

1. It is authorize by special resolution in the general meeting
2. It has already issued such type or class of shares
3. It is to be issued for a lock-in period of 3 years
4. It is valid for a period of not more 12 months from the date of passing of special resolution
5. Certificate from Auditors of the company for the compliance of rules and regulations relating to issue of Sweat Equity Shares, if it is a Listed Company 

• Quantum for issue of Sweat Equity Shares

     1. The issue shall not exceed higher of the following

           - 15% of existing paid up capital, or,

           - Issue value of INR 5 Crores

     2. Issued cannot exceed 25% of the paid up equity capital of the company anytime

     3. A Start up company may issue not exceeding 50% of its paid up capital upto 5 years from the date of its incorporation

• Contents of Special Resolution and Explanatory Statement

The following are to be specified in Special Resolution

1. Number of shares
2. Current market price
3. The Value of the intellectual property rights or technical know-how or other value addition to  be received from the employee or director along with valuation report or basis of valuation
4. Class or Classes of directors or employees to  whom such equity shares are to be issued

The following are to be specified in Explanatory Statement

1. Date of Board Meeting for the approval of issue
2. Reason of the issue
3. Class of shares
4. Total number of shares
5. Class of Directors or Employees
6. Price at which share is issued
7. Consideration or Non-consideration received for the shares
8. A statement declaring that the company will follow the applicable accounting standard
9. Diluted EPS after issue of shares
10. Principle terms and conditions for the issue of such shares
11. The names of directors or employees and their relationship with the promoter or/and KMP’s
12. Time period of association of such person with the company
13. The ceiling on managerial remuneration if any, be breached by propose issue and how it is proposed to be issued.

• Procedure to issue Sweat Equity Shares

1. Call the Board Meeting to consider the proposal of issue of Sweat Equity Shares and to decide the date, time, place and agenda for the General Meeting
2. Hold the General Meeting and pass the necessary resolution for the approval of issue of Sweat Equity Shares
3. File form MGT-14 with ROC intimating of passing of resolution within 30 days of passing the resolution
4. Call the Board Meeting for the allotment of Shares and allot the shares within 15 days of passing of the resolution
5. File form PAS-3 with the ROC within 30 days of passing the resolution  for the allotment of shares
6. In case of Listed Company, apply to the stock exchange and obtain necessary listing and trading approval for the shares so allotted
7. The company shall maintain the register of Sweat Equity Shares in the form of SH-3 about details and particulars of  such Shares

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