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As per Section 54 of the Companies Act, 2013[1], a company issue Sweat equity shares to its directors or Employees at a discount or for a consideration, other than cash for providing Know-how or to make available the rights like the intellectual property rights, by whatever name called. Sweat equity shares are rewards to the employee i.e.
Further, it also includes an employee or a director as defined above of a subsidiary, in India or outside India, or of a holding company of the Company.
In general, these types of shares are rewarded to the employees and directors of the company who bring in their expertise and knowledge including technical expertise by distributing stock or other types of equity in a business. Sweat equity shares are issued to employees and directors, to keep them productive and motivated towards the company.
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Following criteria is required to be fulfilled, for issuance of sweat equity shares –
The company shall issue such shares for-
Further, the issuance of sweat equity shares in the Company shall not exceed 25 percent of the paid-up equity share capital of the company at any time.
Note – In case of Start-up Company the sweat equity share should not increase more than 50% of its paid-up capital up to the period of 5 years from the date of its incorporation.
For the fair price and justifying the valuation, the price of sweat equity shall be valued at a price determined by a registered valuer. The registered valuer shall provide a proper report addressed to the board of directors with justification for the valuation. The registered valuer shall present the gist along with critical elements of the valuation report that is obtained and has to be sent to the shareholders with the notice of the general meeting.
The above mentioned procedure involves mainly two types of forms-
MGT 14 to be filed in 30 days and PAS-3 to be filed in 30 days from the date of allotment of shares in the Board Meeting.
In case where the directors and the company fails to adhere to the provisions related to sweat equity shares, then it may lead to penalty. Although there are no direct penal provisions however general section for punishment shall apply.
The companies issue sweat equity shares because of the following reasons:
Various types of companies issues Sweat Equity Shares like One person Company, Private or Public Company, Section 8 Company etc. In case you need more information on the same, Contact Enterslice.
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