Company Law

Issue of Sweat Equity Shares [S. 54]

1.

Meaning

[S. 2(88)]

“sweat equity shares” means such equity shares as are issued by a Co 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

2.

What can be issued [S. 54(1)]

Sweat equity shares of a class of shares already issued

3.

To whom it can be issued 
[R. 8(1), Expl (i)]

directors or employees

  • a permanent employee of the Co who has been working in India or outside India, for at least last 1 year; or
  • a director of the Co, whether a WTD or not; or
  • an employee or a director as mentioned above, of a subsidiary in India or outside India, or of a Hold Co of the Co;

4.

Quantum [R. 8(4)]
  • Max (NOT > 15% of the existing paid-up Equity Share Capital in a year, OR Shares of the Issue Value of ₹ 5 crores)
  • Not > 25% of the Paid-Up Equity Capital of the Co at any time.

5.

Valuation [R. 8(6)]

Price of equity shares shall be determined by a RV as fair price giving justification for such valuation.

6.

Lock-in [R. 8(5)]

3 years from the date of allotment

7.

Conditions [S. 54(1)]
  • the issue authorized by a Spl Reso
    • allotment to be completed within 12 months of passing Spl Reso [R. 8(3)];
  • 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;
  • at the date of such issue, not < 1 year has elapsed since the date on which the Co had commenced business
    • A startup Co may issue sweat equity shares not exceeding 50% of its paid up capital up to 5 years from the date of its incorporation or registration.
  • where the equity shares of the Co are listed on a recognized SE, the sweat equity shares are issued in accordance with the relevant SEBI regulations.

8.

Pari passu with other equity shareholders [S. 54(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 u/s. 54 and the holders of such shares shall rank pari passu with other equity shareholders.

9.

Accounting treatment and Managerial remuneration [R. 8(6), (9), (10), (11), (12)]

sweat equity shares issued for a non-cash consideration on the basis of a valuation report obtained from RV

where the non-cash consideration takes the form of a depreciable/amortizable asset ↓

Other cases ↓

it shall be carried to the BS of the Co in accordance with AS

  • amount of the accounting value (fair value) of the Sweat Equity Shares as determined a RV under Rule 8(6) > the value of the asset acquired as per the valuation report ➔ shall be treated as a form of compensation to the employee/director in the FS of the Co

It shall be expensed as provided in the AS

  • if the Sweat Equity Shares are not issued pursuant to acquisition of an asset ➔ accounting value of sweat equity shares shall be treated as a form of compensation to the employee/director in the FS of the Co,
  • if issued to any Director/Manager ➔the amount of Sweat Equity Shares issued shall be treated as a part of Managerial Remuneration

10.

Disclosures [R. 8(13)]

Prescribed details are required to be disclosed in the Directors’ Report for the year in which sweat equity shares are issued

11.

Register of Sweat Equity Shares

[R. 8(14)]

To be maintained in Form no. SH.3 at the registered office of the Co or such other place as BoD may decide