Annual Compliance Compliances

Issue of Sweat Equity Shares under Companies Act, 2013

Whenever an investor invests in the market, he gets certain securities of the company in return for the investment made. The investor can subscribe to equity shares, preferential shares or debentures issued by the company. Equity is just like ownership in a business.

In general term, sweat equity is putting in effort and labour to a project.  It is as valuable as cash equity. Sweat equity may be given to the employees as rewards with respect to sweat equity in real estate. It means value-enhancing improvement made by the owners of a property to their properties. Let’s discuss Sweat Equity Shares (SES) more extensively.

What are Sweat Equity Shares & who can issue them?

According to the Companies Act, 2013, Sweat Equity Shares (SES) are issued by a company to its directors or employees at a discount or for consideration other than cash for providing know-how or making any value additions which generate synergy to the company.

SES is one of the methods of making share-based payments to company employees. Issue of sweat equity allows the company to retain the employees by rewarding the employees for their services. Sweat equity rewards the beneficiaries by giving them incentives for contributing to the development of the company.

Under the above-mentioned explanation “Employee” means an employee who has become permanent and has been working in India or outside of India for a minimum of one year; a director of a company who is a whole-time director or part-time; or an employee or a director mentioned before in India or outside India.

SES can be issued by any company registered under the Companies Act, 2013. Amendment to the companies act in the year 2017, now allows any company to issue them. Earlier it could be issued only by those companies which had commenced business at least one year prior to the disbursement of such shares.

Conditions for Issue of Sweat Equity Shares

Conditions for issuance of Sweat Equity Shares are as follows:

• A special resolution must be passed by the company for its issuance.
• The said resolution must specify the number of shares, the present market price and the class of directors or employees to whom these shares are issued.
• The equity shares that are authorised by the special resolution shall be valid for making the allotment within 12 months from the date of passing of the special resolution.
• The company must at least be incorporated for one year.
• If the sweat equity share of a company is listed in a stock exchange, the sweat shares are issued as per the Securities and Exchange Board of India, and if it is not listed, then the shares are issued as per the rules.
• The sweat equity issued to directors or employees shall be locked in for a period of three years from the date of allotment of the shares, and the share certificate shall also be locked in. The expiry period of lock-in shall be stamped in bold or mentioned on the share certificate.

Quantum of Issue of Sweat Equity

Sweat equity shall be issued until 15 % of the existing paid-up equity capital of the company in a year or shares of issue value of 5 crore Rs, whichever is higher.

It is critical to note that the issuance of sweat equity in the company shall not go beyond 25% of the paid-up equity capital of the company at any time. 

Wherein its a start-up company, the issued sweat equity must not increase more than 50 % of its paid-up capital up to the period of 5 years from the date when it was registered or incorporated.

Pricing and Valuation

The pricing of the sweat equity shall be valued at a price determined by the registered valuer to provide justification for the valuation. The valuations of Intellectual Property Rights or know-how or value additions shall be carried out by the registered valuer. The registered valuer shall provide a proper report to the Board of Directors with justification for such valuation. The copy of both the valuation reports should be sent to the shareholders with the notice of the general meeting.

The Procedure of Issuance of Sweat Equity Shares

(I) Firstly, call and hold a board meeting in order to consider the proposal of issue of sweat equity shares and to fix the date, time, place and the agenda for a general meeting and to pass a special resolution for the same.

(II) Then, issue notices in writing to Shareholders for a general meeting along with explanatory statements. It should comprise of the following:

• Date of the Board meeting on which the proposal for issue of SES was accepted.
• The reason behind the issue of shares.
• The class within which the shares are intended to be issued.
• The total number of shares that are to be issued as sweat equity.
• The class or classes of the directors or employees to whom the shares are to be issued
• The terms and conditions on which the SES is to be issued, which includes the basis of valuation. 
• The time period of the alliance of such person with the company.
• The name of the employee or the director to whom the sweat equity shares will be issued and their relationship with the promoter or/and Key Managerial Personnel.
• The rate of sweat equity share.
• The consideration, if any, including consideration other than cash.
• The ceiling on managerial remuneration, if any, shall be breached by the issuance of sweat equity and how is it proposed to be dealt with.
• A statement to the effect specifying that the company shall follow the applicable accounting standards.
• Diluted earnings per share in accordance with the issue of SES, which is calculated as per the applicable accounting standards.

(III) Thereafter, hold the general meeting and pass a special resolution.

(IV) Then, file a resolution with MCA in Form No. MGT-14 within the period of 30 days of passing the special resolution.

(V) After that, call for the board meeting and allot SES in the meeting.

(VI) Form No. PAS-3 has to be filed within 30 days of the passing of the Board resolution for allotting sweat equity.

(VII) Form No. SH-3 for the Register of Sweat Equity shall be maintained, and the particulates of Sweat Equity Shares shall be entered. A Sweat Equity register shall be maintained at the registered office of the company or any other registered office as the board thinks fit. 

(VIII) Eventually, the entries in the registrar shall be authenticated by the Company Secretary (CS) of the company or any other authorised person by the board for the purpose.

Disclosures in the Directors Report

The details of the sweat equity must be disclosed in the Director’s report for the year in which such shares are issued. The details are as follows:-

• Class of directors or employee to whom the Sweat Equity was issued;
• The class of shares issued as Sweat Shares;
• Number of such shares issued to the directors and the other employees and the managerial personnel showing the number of such shares issued to them for consideration apart from cash and the individual names of the allottees holding 1 % or more of the issued share capital;
• The reason for the issue;
• Important terms and conditions for issue of sweat shares, including pricing formula;
• Total number of shares forming as a result of the issue of the equity shares and the percentage of the shares of post issued and paid-up share capital;
• The amount received by the company by the issue of the sweat shares;
• The diluted Earnings per Share in accordance with the issue of sweat equity shares.

Accounting Treatment

Where the Sweat Equity Shares are issued, on the basis of a valuation report obtained from the registered valuer, for non-cash consideration, such non-consideration shall be treated in the books of account of the company in the following manner:-

Where the non-cash consideration becomes a depreciable or amortizable asset, it shall be carried to the company’s balance sheet in accordance with the accounting standards;

Where the above-mentioned clause is not applicable, it shall be expensed off as specified in the accounting standards.

If Sweat Equity Shares (SES) are issued during an accounting period, then the accounting value of SES shall be treated as a form of compensation to the employee or to the director in the financial statements of the company.

Conclusion

It is vital to note that Sweat Equity Shares (SES) are equally valuable as cash. SES is not only being used by start-up firms but also by big successful businesses for rewarding their employees for their hard work and provides them with similar offers so that the employees will continue to serve them with dedication.

Read, More: Process for Buyback of Shares as per Companies Act 2013.