Sweat Equity: A Sweet Reward by the Company By Kush Gupta


 
A. INTRODUCTION

Sweat Equity is a sweet recognition/reward to the employee of their work. It maintained employees motivated and keep their interest in the growth and development of the Company. offering sweat equity not only serves as an effective incentive model but at the same time, it ensures that its key employees don’t leave the company. This is so because shares allotted under sweat equity gets locked-in for a period of three years from the allotment.

B. MEANINGS: S
weat Equity Shares

Section 2(“sweat equity shares” means such equity 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:

  • The issue of sweat equity shares is done by passing a special resolution. 

  • Following the issue of shares, they will be non-transferrable for a time of 3 year period.

  • The price at which the sweat equity shares and the valuation of intellectual property rights or of know-how or value additions for which sweat equity shares are to be issued will be valued by a registered valuer.

C. SCOPE

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, ALSO, 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. Hence, before thinking about rewarding the human assets, the company must analyze the eligibility criteria.

However, 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 up to five years from the date of its incorporation or registration.

D. DIFFERENCE BETWEEN ESOP AND SWEAT EQUITY SHARES
 

Basis

Sweat Equity

Employees Stock Option (ESOP)

Provision

Governed by Section 54 of the Companies Act 2013, read with Rule 8 of Companies (Share Capital and Debenture) Rules 2014.

Governed by Section 62(1)(b) of the Companies Act 2013, read with Rule 12 of Companies (Share Capital and Debenture) Rules, 2014.

Eligibility

Directors, Employees, or any Officers of the Company.

Employees, Officers, and Directors not holding 10% or more equity shares of the Company.Exclusions:1.    i) Promoters or person belonging to promoter group.2.    II) Independent Director.iii) Directors holding 10% or more equity shares in the Company.

Consideration

at a discount or for consideration, other than cash.

Consideration has to be paid through cash only and the purchase of shares shall be made only through a recognized stock exchange in case the shares of the company are listed and not by way of private offers or arrangements;

Lock-in Period

It has a compulsory lock-in period of 3 years.

Company shall have the freedom to specify the lock-in period for the shares issued pursuant to the exercise of the option.

Restrictions on Issue

Sweat Equity Shares cannot be issued for more than 15% of the paid-up equity share capital in a year or shares of the value of 5 crores; whichever is higher.

There are no such restrictions in issuance or grant of ESOP.  the value of shares to be purchased or subscribed in the aggregate together with the money provided by the company shall not exceed five per cent. of the aggregate of paid up capital and free reserves of the company;

 Pricing Guidelines

The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as for the fair price giving justification for such valuation. Further, the valuation of IPR, or Know-how, or value additions for which equity shares are to be issued shall also be carried out by a registered valuer with proper justification. And both the valuation reports should be sent to the shareholders along with notice calling the General Meeting.

 the valuation at which shares are to be purchased shall be made by a registered valuer.

Register

The Company shall maintain a Register of Sweat Equity Shares in Form SH-3.

The Company shall maintain a Register of Employees Stock Options in Form SH-6.


E. DETAILED
CONDITIONS AND PROCEDURES

  1. MEANING OF “EMPLOYEE” IN REFERENCE TO SWEAT EQUITY

“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;

  1. GROUNDS OF REWARDING

As per Explanation (ii) to Rule 8(1) of the Companies (Share Capital and Debentures) Rules, 2014, “Employee” 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.
 
  1. ELIGIBILITY

  • the issue is authorized by a special resolution passed by the company;

  • 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;

  • 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 in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.

  • The rights, limitations, restrictions, and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank pari passu with other equity shareholders.

  • The sweat equity shares issued to directors or employees shall be locked in/non transferable 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.

1) The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as for the fair price giving justification for such valuation.

2) The valuation of intellectual property rights or of know how or value additions for which sweat equity shares are to be issued, shall be carried out by a registered valuer, who shall provide a proper report addressed to the Board of directors with justification for such valuation.

3) A copy of gist along with critical elements of the valuation report obtained under clause (1) and clause (2) shall be sent to the shareholders with the notice of the general meeting.

  1. BOARD PROCEDURE FOR ISSUANCE OF SWEAT EQUITY

1) 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 the general meeting and to pass a special resolution for the same.
2) Issue notices in writing to Shareholders for the 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 the 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.

3) Convene the General Meeting and Pass a special resolution.

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

5) Call the Board Meeting and Allot sweat equity shares in the meeting.

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

7) 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.

8) The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide.

9) 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.

  1. DISCLOSURE IN THE DIRECTORS’ REPORT IN RESPECT OF SWEAT EQUITY SHARE

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:?
  • the class of director or employee to whom sweat equity shares were issued;

  • the class of shares issued as Sweat Equity Shares;

  • 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;

  • the reasons or justification for the issue;

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

  • 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;

  • the consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares;

  • the Diluted Earnings Per Share (EPS) pursuant to the issuance of sweat equity shares.

  1. ACCOUNTING TREATMENT OF SWEAT EQUITY SHARE ISSUED

  • Where sweat equity shares are issued for a non-cash consideration on the basis of a valuation report in respect thereof obtained from the registered valuer, such non-cash consideration shall be treated in the following manner in the books of account of the company-

  1. where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the accounting standards; or

  2. where clause (a) is not applicable, it shall be expensed as provided in the accounting standards.

  • The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purposes of sections 197and 198 of the Act, if the following conditions are fulfilled, namely.-

  1. the sweat equity shares are issued to any director or manager; and

  2. they are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards.

  • In respect of sweat equity shares issued during an accounting period, the accounting value of sweat equity shares shall be treated as a form of compensation to the employee or the director in the financial statements of the company, if the sweat equity shares are not issued pursuant to the acquisition of an asset.

  • If the shares are issued pursuant to acquisition of an asset, the value of the asset, as determined by the valuation report, shall be carried on the balance sheet as per the Accounting Standards and such amount of the accounting value of the sweat equity shares that are 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.

Explanation.- For the purposes of this sub-rule, it is hereby clarified that the Accounting value shall be the fair value of the sweat equity shares as determined by a registered valuer under Rule 8(6) of the Companies (Share Capital and Debentures) Rules, 2014.

F. CONCLUSION

It is always recommended to reward human assets of the Company to attain long-term growth. No doubts before going ahead with the Issuance of Sweat equity to the productive employee, knowledgeable directors, and efficient promoter the issuer Company should look forward to the all the legal, secretarial, financial, accounting effects and treatments required. it is also pertinent to mention that simple thought of sweat equity increase the believe, respect and lower the employee turnover ratio.

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