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Do you wish to issue sweat equity shares?- company registration

Note that the sweat equity shares mean equity shares either issued by the company to its directors or employees at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions or by whatever name called.

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Check whether at least 1 year has elapsed since the date on which your company has commenced business.

Decide before convening a board meeting, the number of shares, their current market an price and consideration, if any, and the class or classes of directors or employees to whom such of sweat equity shares are proposed to be issued.

Convene a board meeting after giving not less than seven days’ notice to every director of the company at his address registered with the company as per section 173(the 3) of the 2013 act 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.

Beware that every officer of the company whose duty is to give notice of the board meeting as aforesaid and who fails to do so will be punishable by a fine of up to Rs.25000.

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Issue notices in writing or through electronic mode in the manner prescribed under rule 18(1) and 18(2) of the companies’ rules 2014 not less than clear twenty-one days before the date of the meeting section 10(1) of the 2013 act for the general meeting with a suitable explanatory statement. (Section 102(1) of the 2013 act). If your company is listed or is a company having not less than 1000 shareholders, your company shall also provide its members facility to exercise their right to vote of general meetings by electronic means (section 108 of the 2013 act read with rule 20 of the companies management and administration) rules, 2014 and clause 35-B of the standard listing agreement. In case your company is listed, the resolution needs to be passed by postal ballot process.

Ensure that the proposed special resolution contained in the aforesaid notice specifies the number of shares, their current market price, and consideration if any and the class or classes of directors or employees to who such sweat equity shares are to be issued. (Section 54(1)(b) of the 2013 act (corresponding to section 79A of the 1956) act). Also, note that the special resolution shall be valid for a period of not more than twelve months from the date of passing the special resolution.

Further, ensure that the explanatory statement to the notice and the resolution for approving the issuance of sweat equity should inter alia contain the following information:

  • The date of the board meeting at which the proposal for issue of sweat equity shares was approved.
  • The reason or justification for the issue.
  • The class or shares under which sweat equity shares are intended to be issued.
  • The terms and conditions on which the sweat equity shares can be issued which includes the basis of valuation.
  • The names of the director or employees to whom the sweat equity shares will be issued and their relationship with the promoter or a key managerial personnel.
  • Sweat equity shares are proposed to be used based on the price.
  • If any has to be received for the sweat equity, the consideration must be there other than the cash.
  • The ceiling on managerial remuneration if any breach by the issuance of such sweat equity and how it is proposed to be dealt with.
  • A statement to the effect that the company shall conform to the applicable accounting standards;
  • Diluted earnings per share pursuant to the issue of sweat equity shares calculated in accordance with the applicable accounting standards.

Listed companies must pass the special resolution at its general meeting, for an issue of sweat equity shares to employees and directors by way of postal ballot.

If the sweat equity shares are to be issued by a listed company to its promoters obtain the approval of shareholders:

  • By a simple majority in general meeting; and also
  • Through postal ballot as specified under section 110 of the 2013 act and rule 22 of the companies (Management and Administration ) rules, 2014.
  • The promoters to who such sweat equity shares are proposed to be issued shall not participate in such resolution.
  • Each transaction shall be voted by a separate resolution.
  • The resolution shall be valid for a period of 12 months from the date of passing the special resolution.

Hold the general meeting and pass the special resolution by the three-fourths majority as required.

File the special resolution with the concerned ROC with explanatory statement in MGT-14 within thirty days, after paying the requisite fee prescribed under rule 12 of the companies (registration offices and fees) rules, 2014 read with the table annexed to these rules or with such additional fee as specified and within the time specified under section 403 of the 2013 act.

See that the said form is filed electronically and the copy of the special resolution and the explanatory statement are filed with it as attachments.

Ensure that the said form is digitally signed by the managing director or director or manager or secretary of the company duly authorized by the board of directors.

Further, ensure that the said form is certified by a chartered accountant or a cost accountant or a company secretary in whole time practice by digitally signing the said e-form.

Remember that if default is made in complying with the aforesaid requirement of filing the special resolution before the expiry of the period specified under section 403 of the 2013 act with additional fee, the company will be punishable with a fine amount which should not be less than five lakh rupees,  but that may extend to 25 lakh rupees and every officer of the company, in default, it may be punishable with a fine amount that should not be less than one lakh rupees but may extend to 5 lakh rupees.

Note that the offenses mentioned in item nos.5 and 16 above are compoundable by the tribunal or such officer as may be authorized by the central government under section 441 of the 2013 act.

If your company’s equity shares are not listed on any recognised stock exchange then issue of the sweat equity shares in accordance with the rule 8 of the companies rules, 2014 and if the shares of your company are listed with any of the recognised stock exchange then issue the sweat equity shares in accordance with the securities exchange board of India regulations, 2002 and rule 8 of the companies (share capital and debenture) rules, 2014.

Note that your company cannot issue sweat equity shares for more than 15%of the existing paid-up share capital in a year or shares of the issue value of Rs.5 Crores, whichever is higher, provided that 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.

The sweat equity shares to be issued to the directors and 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 locking and the period of expiry of lock-in shall be stamped in bold or mentioned in any other prominent manner on the share certificate.

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

The intellectual property rights valuation or of know how or value addition for which sweat equity shares to be issued can be carried out by a registered valuer who can provide a proper report addressed to the board of directors with the justification for such valuation.

A copy of a real point of an action with the critical elements of the valuation report which is obtained under clause 6 and 7 of rule 8 of the companies rules, 2014 that shall be sent to the shareholders with the notice of the general meeting.

Sweat equity shares are issued or non-consideration on the basis of a valuation report which is respect thereof obtained from the registered valuer, that non-cash consideration may be treated in the following manner in a book of accounts of the company.

The non-cash consideration takes the form of a depreciable or an amortizable asset; it may be carried to the balance sheet of the company in accordance with the relevant accounting standards;

Or if it doesn’t take the form of an amortizable asset or a depreciable one, it may be expensed as provided in the relevant accounting standards.

The sweat equity shares amount may be treated as a part of managerial remuneration for the purposes of section 197 and 198 of the 2013 act if the following conditions are fulfilled:

  • The sweat equity shares may be issued to any manager or director; and
  • They have been issued for the consideration other than the cash which may not take the form of an asset that can be carried to the balance sheet of a company in accordance with the applicable accounting standards.

With respect to sweat equity shares issued during the accounting period, the accounting value of sweat equity shares can be treated as a form of compensation to the employee or a director in financial statements of the company, if the sweat equity shares were issued pursuant to the acquisition of an asset.

If the shares were issued pursuant to acquisition of the asset, the asset value will be determined by the valuation report that could be carried on the balance sheet as per the accounting standards and such amount of the accounting value of the sweat equity shares which is in excess of the value of the asset acquired, as per the valuation report it can be treated as a form of compensation to the director or employee in the financial statements of the company.

The following shall be included in the directors’ report:

  • The class of directors 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 1% 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 price formula;
  • The total number of shares arising as a result of an issue to sweat equity shares.
  • The percentage of the sweat equity shares of the total post issued and paid 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.

Remember to maintain a register of sweat equity shares in Form SH 3 and enter the particulars of sweat equity shares issued. The register shall be maintained at the registered office of the company and the entries shall be authenticated by the company secretary of the company or such other person authorized by the board for this purpose.

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