Procedures under Companies Act, 2013

Issue of Sweat Equity Shares by an Unlisted Company

Meaning of "Sweat Equity Shares" (Section 2(88)): 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.

'Value additions' 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. (Explanation (ii) of Rule 8(1) of the Companies (Share Capital and Debentures) Rules, 2014

Text of the provision of Section 54: (1)Notwithstanding anything contained in section 53 (Prohibition on issue of shares at discount), a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely-

    (a) the issue is authorised by a special resolution passed by the company;

    (b) 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;

    (c) not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business; and

    (d) where the equity shares of the company are listed on a recognised 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.

(2) 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.

Key Considerations:

    1. Board Resolution for considering the issue of sweat equity shares cannot be passed by circulation. (S.179 (3)(c).

    2. In case of a listed Company, the sweat equity shares shall be issued in accordance with the regulations made by the Securities and Exchange Board in this behalf. The unlisted Companies can issue such shares in accordance with the procedure explained below. [Section 54(1) (d)]

    3. Company can issue sweat equity shares only after the expiry of oneyear, since the date on which the company was entitled to commence business. [Section 54(1)(c)]

    4. The company shall not issue sweat equity shares for more than 15% of the existing paid up equity share capital in a year or shares of the issue value of Rupees 5 crores, whichever is higher.Further, the issuance of sweat equity shares in the Company shall not exceed 25% of the paid up equity capital of the Company at any time. [Rule 8(4) of the Companies (Share Capital and Debentures) Rules, 2014]

3. Sweat equity shares are permitted to be issued to the following category of employees as per Explanation to Rule 8(1) of Companies (Share Capital and Debentures) Rules, 2014-

    (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;

The following procedure is to be followed for Issue of Sweat Equity Shares by an Unlisted Company under Section 54 read with Rule No. 8 of the Companies (Share Capital and Debentures) Rules, 2014-

1. Ensure that share capital as increased by the proposed issue of sweat equity shares should be within the authorized share capital of the Company and if not, necessary steps have to be taken to increase the authorized share capital of the company. [Refer Procedure for Increasing Authorised Share Capital of Company].

2. Obtain the valuation report from the registered valuer addressed to the Board, for determining the fair price for issue of sweat equity shares and for valuation of intellectual property rights or of know how provided or other value additions for which sweat equity shares are to be issued and with justification for such valuation. (Rule 8(6) and 8(7) of Companies (Share Capital and Debentures) Rules, 2014

3. Issue not less than 7 days notice and agenda of Board meeting, or a shorter notice in case of urgent business, in writing to every director of the company at his address registered with the company and call a Board Meeting to consider the proposal of issue of Sweat Equity Shares . (Section 173(3). Also follow the procedure prescribed for issuing and signing of notice of Board Meeting.

4. Hold a meeting of the Board of Directors-

  • To pass the necessary Board Resolution for considering the proposal of issue of Sweat Equity Shares subject to the approval of shareholders by a special resolution in a general meeting. Resolution must specify the number of shares, their current market price, consideration, if any, and the class or classes of directors or employees to whom such Sweat Equity Shares are to be issued. (S. 54(1)(b)

  • To authorize Company Secretary or any Director to sign and file the relevant form with Registrar of Companies and to do such acts, deeds and things as may be necessary to give effect to the Boards decision.

  • To fix day, date, time and venue for holding general meeting of the Company for passing a special resolution for issue of Sweat Equity Shares.

  • To approve the draft notice of general meeting along with explanatory statement annexed to the notice as per requirement of the Section 102 of the Companies Act, 2013.

  • To authorize the Director or Company Secretary to sign and issue notice of the general meeting.

5. Prepare and circulate draft minutes within 15 days from the date of the conclusion of the Board Meeting, by hand/speed post/registered post/courier/e-mail to all the Directors for their comments. Alsofollow the procedure prescribed for preparing, circulation, signing and compiling of Board Minutes. (Secretarial Standards-1 )

6. In case of a public company, file a copy of Board Resolution in Form MGT-14 with Registrar of Companies within 30 days from the date of Board Meeting. (S. 117(3)(g) read with S. 179 (3)( c).

7. The explanatory statement annexed to the notice of the general meeting pursuant to Section 102 shall 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/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) Principal terms and conditions on which sweat equity shares are to be issued, including basis of valuation;

    (g) 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) ceiling on managerial remuneration, if any, which will be breached by issuance of such sweat equity and how is it proposed to be dealt with;

    (l) a statement to the effect that the company shall conform to the applicable accounting standards; and

    (m) Diluted Earnings Per Share pursuant to the issue of sweat equity shares, calculated in accordance with applicable accounting standards. [Rule 8 (2) of the Companies (Share Capital and Debentures) Rules, 2014]

8. Send notice of the General Meeting proposing the special resolution to all the shareholders, auditors, directors and other persons entitled to receive it by giving not less than clear 21 days notice or shorter notice, if consent for shorter notice is given by at least 95% of members entitled to vote at such meeting, either in writing or through electronic mode (Section 101). Also follow the procedure prescribed for issuing and signing of notice and convening of General Meeting.

9. A copy of gist along with critical elements of the valuation report obtained from the valuer shall be sent to the shareholders with the notice of the general meeting. [Rule 8(8) of the Companies (Share Capital and Debentures) Rules, 2014

10. Hold the general meeting on the date fixed for the meeting and pass the Special Resolution by 3/4th majority in accordance with Section 114 (2) of the Act.

11. After passing special resolution, file a certified copy of special resolution with the Registrar in E-Form No. MGT.14 under Section 117 of the Act within 30 days of the date of general meeting along with the following attachments:

    a. Copy of Special Resolution passed along with Explanatory Statement.

    b. Notice for convening the General Meeting of the Company

    c. Shorter Notice Consent Letters from the members in case the General Meeting was convened at shorter notice.

    d. Any other attachment as may be applicable.

12. Follow the procedure prescribed for preparing, signing and compiling of minutes of General Meeting.

13. Issue not less than 7 days notice of Board meeting, or a shorter notice in case of urgent business, in writing to every director of the company at his address registered with the company. (Section 173(3). Also follow the procedure prescribed for issuing and signing of notice of Board Meeting.

14. Hold a meeting of the Board of Directors within 12 months from the date of passing of special resolution-

  • To approve allotment of sweat equity shares

  • To authorize Company Secretary or any Director to sign and file the relevant form with Registrar of Companies and to do such acts, deeds and things as may be necessary to give effect to the Boards decision

  • To authorize Directors and Company Secretary/any other person to sign and issue the share certificate to the allottees. (Rule 8 (3) of the Companies (Share Capital and Debentures) Rules, 2014 and Rule 5(3) of the Companies (Share Capital and Debentures) Rules, 2014]

15. Prepare and circulate draft minutes within 15 days from the date of the conclusion of the Board Meeting, by hand/speed post/registered post/courier/e-mail to all the Directors for their comments. Alsofollow the procedure prescribed for preparing, circulation, signing and compiling of Board Minutes.(Secretarial Standards-1 )

16. File a return of allotment in Form No. PAS-3 with the Registrar within 30 days of allotment of securities by the company having a share capital. [Section 39(4) and Rule No. 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014] along with the following attachments:

    a) A copy of the special resolution passed in the general meeting authorizing the issue of sweat equity shares.

    b) Copy of Board Resolution approving the allotment of shares.

    c) List of allottees stating their names, address, occupation, and number of securities allotted to each of the allottees and the list shall be certified by the signatory of the Form PAS-3 as being complete and correct as per the records of the company ;

    d) Valuation report of the Registered Valuer

    e) In case shares issued for consideration other than cash, duly stamped copy of contract pursuant to which shares have been allotted together with any contract of sale if relating to a property or an asset, or a contract for services or other consideration. If the contract is not in writing, company shall furnish complete particulars of the contract stamped with the same stamp duty as would have been payable if the contract had been reduced to writing. for consideration other than cash, if any;

    f) Any other document as may be applicable.

17. In case the shares are held in demat form, the company shall intimate the details of allotment of securities to the depository immediately on allotment of such securities. (Proviso to Section 56(4)).

18. If the shares are held in physical form, Issue share certificates to the Allottees in Form SH-1 or as near thereto as possible within a period of two months from the date of Allotment. [Section 56(4)(b)] Share certificate shall specify the name(s) of the person(s) in whose favor the certificate is issued, the shares to which it relates, the amount paid-up thereon and the fact that 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. (Rule 5(2) and Rule 8(5) of Companies (Share Capital and Debentures) Rules, 2014

19. Share certificate may be issued under the seal of the Company, if any which shall be affixed in the presence of, and signed by:

    (a) two directors duly authorized by the Board of Directors or the committee of the Board, if so authorized by the Board; and

    (b) the secretary or any person authorised by the Board.

In case the company does not have a common seal, the share certificate shall be signed by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary.

If the composition of the Board permits, at least one of the aforesaid two directors shall be a person other than the managing or whole-time director.

Further, in case of a One Person Company, Share certificate may be issued under the seal of the Company, if any which shall be affixed in the presence of, and signed by one director or a person authorized by the Board of Directors and the Company Secretary, or any other person authorized by the Board. (Rule 5(3) of Companies (Share Capital and Debentures) Rules, 2014

20. Pay the requisite stamp duty on the share certificates in accordance with the provisions of the Indian Stamp Act.

21. Make necessary entries in the Register of Sweat Equity shares, Register of Members and Register of Directors and key managerial personnel and their shareholding, if applicable. (Rule 5(4) and Rule 8(14) of Companies (Share Capital and Debentures) Rules, 2014

Notes:

    1. 1. The special resolution authorizing the issue of sweat equity shares shall be valid for making the allotment within a period of not more than 12 months from the date of passing of the special resolution. [Rule 8 (3) of the Companies (Share Capital and Debentures) Rules, 2014]

    2. Sweat equity shares issued to directors or employees shall be locked in/non transferable for a period of 3 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. [Rule 8(5) of the Companies (Share Capital and Debentures) Rules, 2014]

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

    (a) 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

    (b) where clause (a) is not applicable, it shall be expensed off as provided in the accounting standards. [Rule 8(9) of the Companies (Share Capital and Debentures) Rules, 2014]

    4. The amount of Sweat Equity Shares issued shall be treated as part of managerial remuneration for the purposes of sections 197 and 198 of the Companies Act, 2013 if the following conditions are fulfilled:

      (a) the sweat equity shares are issued to any director or manager; and

      (b) 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. [Rule 8(10) of the Companies (Share Capital and Debentures) Rules, 2014]

    5. 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 acquisition of an asset. [Rule 8(11) of the Companies (Share Capital and Debentures) Rules, 2014]

    6. 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 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. [Rule No. 8(12) of the Companies (Share Capital and Debentures) Rules, 2014]

    7. The following details of issue of sweat equity shares are required to be disclosed in Directors Report:

      (a) Class of director/ employee to whom sweat equity shares were issued;

      (b) Class of shares issued as Sweat equity Shares;

      (c) 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 1% or more of the issued share capital ;

      (d) the reasons/justification for the issue;

      (e) Principal terms and conditions for issue of sweat equity shares, including pricing formula;

      (f) the total number of shares arising as a result of issue of sweat equity shares;

      (g) percentage of the sweat equity shares of the total post issued and paid up share capital;

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

      (i) diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares. [Rule 8(13) of the Companies (Share Capital and Debentures) Rules, 2014]

    8. 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. The Register shall be maintained at the registered office of the company or such other place as the Board may decide. [Rule 8(14) of the Companies (Share Capital and Debentures) Rules, 2014]

    9. 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. [Rule 8(14) of the Companies (Share Capital and Debentures) Rules, 2014]

    10. 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 and the holders of such shares shall rank pari passu with other equity shareholders. [Section 54(2)]11. Share certificates may be signed by printing the signatures thereon as a facsimile signature by means of any machine, equipment or other mechanical means such as engraving in metal or lithography, or digitally signed, but not by means of a rubber stamp, (Explanation to Rule (5)(3) of Companies (Share Capital and Debentures) Rules, 2014


Procedure Authors

ACS Divya Jain
ACS Palak Jain
ACS Ankita Jain
ACS Sugandh Jain
ACS Mansi Kapor
ACS Bhawna Sharma


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