Under the Companies Act, 2013 (“Act”), there are limited ways in which dedicated employees of the company can be rewarded or remunerated by issue of shares. One of the ways of rewarding or remunerating such employees is issue of sweat equity shares by the company. Section 2(88) of the Act defines “sweat equity shares” as equity shares 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 the definition of sweat equity, there is a reference to the expression “value additions”. It 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 employee.
It is interesting to note that the rights, limitations, restrictions applicable to equity shares shall be applicable to the sweat equity shares. The holders of sweat equity shares shall rank pari passu with other equity shareholders.
This article is a checklist for private companies and unlisted public companies for the issue of sweat equity shares under the Act and the Rules made thereunder. The listed companies shall comply with the SEBI (Securities and Exchange Board of India) Regulations in addition to the provisions of the Act.
- Meaning “Employee” and “Director” for Issue of Sweat Equity Shares.—According to the provisions of the Companies (Share, Capital and Debentures) Rules, 2014, a company can issue sweat equity shares to its directors or employees, which means:
(i) Permanent employee of the company who has been working in India or outside India; or
(ii) director of the company, whether a whole-time director or not; or
(iii) employee or a director of the subsidiary company, in India or outside India; and
(iv) employee or a director of the holding company;
Therefore, the company shall ensure that the sweat equity shares are offered and allotted to an employee (as defined above) or directors and such employee provides know-how or makes available rights in the nature of intellectual property rights or value additions.
- Valuation.—The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as the fair price giving justification for such valuation. 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.
- Limit on Issue of Sweat Equity Shares.—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 Rs. 5 crores, whichever is higher. However, 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. However, a startup company may issue sweat equity shares not exceeding 50% of it’s paid up capital upto 5 years from the date of its incorporation.
- Lock-in for Sweat Equity Shares.—The sweat equity shares issued to directors or employees shall be locked-in i.e. non transferable for a period of 3 years from the date of allotment.
- Approval of the Board of Directors.—According to the amendment introduced by the Companies (Amendment) Act, 2017, the company can issue sweat equity shares even when it has not commenced its business. A company can issue sweat equity shares to its employees or directors after obtaining the approval shareholders by passing a special resolution. Therefore, in such cases, the Board of Directors shall accord it’s in principle approval for such issue. The points that shall be discussed in the board meeting and which shall also be part of the minutes of the meetings are justification for such issue, number of shares proposed to be offered and allotted, details of the employees or directors to whom such shares will be issued, principal terms and conditions on which sweat equity shares are to be issued, issue price, basis of valuation, consideration including consideration other than cash, if any to be received for the sweat equity, provisions relating to managerial remuneration, etc. The Board of Directors may also note the pre-issue and post-issue shareholding pattern of the company.
- Approval of the Shareholders.—After obtaining the approval of the directors, the company shall obtain shareholders’ approval by passing a special resolution. A copy of gist along with critical elements of the valuation report shall be sent to the shareholders along with the notice of the general meeting. The explanatory statement to be annexed to the notice of general meeting shall contain the particular prescribed under the Companies (Share Capital and Debentures) Rules, 2014. The company shall file e-Form MGT-14 with the Registrar of Companies along with the fee as specified in the Companies (Registration Offices and Fees) Rules, 2014.
The special resolution authorising 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.
- Allotment of Sweat Equity Shares.—After the approval of the shareholders, the company shall make a private offer to the specific employees. After receipt of share application money, the Board of Directors shall allot the sweat equity shares to the employees. The board shall also authorise directors for ensuring post-allotment compliances.
- Post-Allotment Compliances.—After allotment of sweat equity shares, the company shall, within 30 days thereafter, file with the Registrar a return of allotment in e-Form PAS-3, along with the fee as specified in the Companies (Registration Offices and Fees) Rules, 2014. The company shall issue share certificates within 2 months 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 stamped in bold or mentioned in any other prominent manner on the share certificate.
After allotment of sweat equity shares, the company secretary of the company or any other authorised person by the Board of Directors shall make necessary entries in the register of members within 7 days from the date of allotment.
- Maintenance of Register of Sweat Equity Shares.—The company shall also maintain Register of Sweat Equity Shares in a prescribed form (Form No. SH-3) and shall forthwith enter therein the particulars of sweat equity shares issued. The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board of Directors may decide. The entries in the register shall be authenticated by the company secretary of the company or by any other person authorised by the Board of Directors for the purpose.
*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at firstname.lastname@example.org.
 As defined in DIPP Notification No. GSR 180(E) dated 17-2-2016.