Issue of Sweat Equity Shares for a Private Limited Company

The “Sweat equity shares” means such equity shares, which are being issued by a Company to its directors or employees at a discount or for the purpose of 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.

The issuing 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.

Essentials of Sweat Equity:

1. Eligibility to hold Sweat

  • Permanent employee of the Company who has been working in India or outside India, for at least last 1 year
  • Director of Company-Whole time director or not
  • 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

2. Value Addition

Value addition has been defined as the actual or anticipated economic benefits that has been derived or to be derived by Company from an expert or a professional for providing know-how or making the available rights in the nature of intellectual property rights.

3. Authorization by shareholders

Yes, prior shareholders’ approval through special resolution is required.

4. Time limit for issuing Sweat

Allotment of the sweat equity shares has to be necessarily made within 12 months from the date of passing a special resolution.

5. Time Gap

There should mandatorily be at least 1 year between the commencement of business and issue of such shares.

6. Valuation

Valuation of the sweat shares and the intellectual property rights(IPR)/know how/ value additions shall be done by Registered Valuer.

7. Notice of General Meeting

The critical elements of Valuation Report shall be sent along with the Notice. The particulars like class of shares, price, consideration, key terms of conditions, employees to whom sweat is proposed are required to be mentioned in the explanatory statement.

8. Limit on sweat equity

In a year, sweat shares shall not exceed 15% of the existing paid up equity share capital or shares having issue value of Rs. 5, 00,00,000, whichever is higher. However, it should under any circumstances not exceed 25% of paid up equity capital of a Company at any time.

9. 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.

10. Nature of treatment of sweat issued for other than cash in Books of accounts

  • If non-cash consideration takes the form of a depreciable or amortizable asset- Should be carried to the balance sheet according to the accounting standards; or
  • In other cases- Shall be expensed as provided in the accounting standards.

11. Accounting value of sweat equity

  • If sweat equity shares are not being 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.
  • If sweat equity shares are being issued for acquisition of an asset- The value of the asset, as determined by the valuation report, would 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.

12. Rights/limitations/restrictions applicable on sweat equity shares

Shall rank at the same rate or on an equal footing with other equity shareholders.

13. Disclosure in Directors Report

Particulars like the class of director or employee, class of shares, the number of sweat equity shares, the percentage of sweat equity shares in total post issued and paid up share capital, diluted Earnings Per Share and consideration received.

14. Register of Sweat Equity Shares

Details of sweat shares would be mentioned in this Register. Shall be maintained at Registered Office or such other place as the Board may decide. Entries shall be mandatorily authenticated by CS of the Company or by any other person authorized by the Board.

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