Procedure for the Issue of Sweat Equity Shares – Section 54 of the Companies Act

Ashish M. Shaji

06 Sep, 2022

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.

• The Employee of the company who has been working in India or Outside India, (Here employee refers to the permanent employee),
• A director of the Company (A director can be a whole-time director or not).

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.

What are the Criteria for the issuance of Sweat Equity Shares?

Following criteria is required to be fulfilled, for issuance of sweat equity shares –

• The sweat equity shares can be issued after one year of incorporation of the company.
• It must be authorized by passing a special resolution by the company in the general meeting.
• The resolution must specify-

1. The Number of shares,
2. Current Market price and consideration,
3. Class or classes of directors or employees to whom such equity shares are to be issued.

• In the case of Listed Company, where the shares are listed on a recognized stock exchange, a company is required to comply with the SEBI regulations made in this behalf by Securities and Exchange Board of India.
• While, in the case of Unlisted Company, where the shares are not listed shall issue such type of shares in compliance with the rules made in the behalf by the Central Government.
• In the general meeting, the resolution passed for issuance of sweat equity shares shall be valid for allotment within a period of not more than 12 months from the date of passing the special resolution.
• Lock in period of 3 years from the date of allotment of the shares and the period of lock-in shall be stamped in bold or mentioned on the share certificate prominently. Further, the fact that the share certificates are also under lock-in.

What are the Limits for the issuance of the Sweat Equity Shares?

The company shall issue such shares for-

1. Not more than 15 percent of the existing paid-up equity share capital in a year or,
2. The issue of the share value of rupees 5 crores whichever is higher.

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.

Pricing of the Sweat Equity Shares

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.

What is the Procedure of issuing Sweat Equity Shares?

• To conduct a Board Meeting for considering the issue of shares and further, to issue a notice for the general meeting.
• Hold Board meeting to issue Sweat Equity shares and then file form PAS-3 with ROC
• After passing the Board resolution, to conduct a General Meeting to pass the special resolution which shall specify –
• the number of shares,
• In case if the shares are listed current market price,
• Consideration of issue if any and the class or classes of directors or employees to whom such shares are to be issued
• An explanatory statement must be attached along with the notice of General Meeting and shall include the following:

1. The date on which the Board Resolution was passed for the issue of shares.
2. Reasons or justification for the issue of Sweat equity shares and the class of shares under which these shares are intended to be issued.
3. The total number of shares to be issued and also the description of class or classes of directors or employees to whom such equity shares are to be issued.
4. Criteria and conditions on which such shares are to be issued.
5. Basis of valuation.
6. The period of Employment of such person (i.e. Employee and Director) with the company along with the name to whom the sweat equity shares.
7. Pricing of the sweat equity shares which are proposed to be issued.
8. Consideration to be received for the sweat equity including consideration other than cash, if any.
9. To comply with the applicable accounting standards.

• File the special resolution in Form MGT-14.
• The company shall disclose all the details of issuing such type of shares in the Board report.
• Maintenance of register of Sweat equity shares i.e. after allotting the entry for the same shall be done in the register.

What are the types of forms associated with sweat equity shares allotment?

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. 

Penalty in case of Non-Compliance

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. 

Why are Sweat Equity Shares issued by Companies?

The companies issue sweat equity shares because of the following reasons:

• It provides an opportunity for the company to attract and also retain employees by rewarding their contribution.
• Sweat equity is direct allotment of shares at discount.
• It is a method of rewarding beyond sitting fee for some independent directors who by some great interventions help company to grow at greater level.

Conclusion

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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