Sweat Equity Shares

Sweat equity shares are shares, which are issued by a Company to its directors or employees at a concessional price or for consideration, other than cash, for providing their expertise or making rights accessible in the nature of intellectual property rights or value additions etc.

As per (Share Capital and Debentures) Rules, 2014 there are certain restrictions on the issuance of sweat equity shares as follows:-

1. A company other than a listed company, which is not required to comply with the Securities and Exchange Board of India Regulations (SEBI) on sweat equity, shall not issue sweat equity shares to its directors or employees at a discount or for consideration other than cash, for their providing knowhow or making available rights in the nature of intellectual property rights or value additions, by whatever name called, unless the issue is authorized by a special resolution passed by the company in general meeting.
2. The special resolution authorizing the issue of sweat equity shares shall be valid for making the allotment within a period of not more than twelve months from the date of passing of the special resolution.
3. The company shall not issue sweat equity shares for more than fifteen percent of the existing paid up equity share capital in a year or shares of the issue value of rupees five crores, whichever is higher. Provided that the issuance of sweat equity shares in the compan shall not exceed twenty five percent, of the paid up equity capital of the Company at any time.
4. The sweat equity shares issued to directors or employees shall be locked in/non transferable for a period of three years from the date of allotment and the fact that the share certificates are under lock-in and the period of expiry of lock in shall be stamped in bold or mentioned in any other prominent manner on the share certificate.
5. The sweat equity shares to be issued shall be valued at a price determined by a registered valuator as the fair price giving justification for such valuation.
6. The valuation of intellectual property rights or of know how or value additions for which sweat equity shares are to be issued, shall be carried out by a registered valuator , who shall provide a proper report addressed to the Board of directors with justification for such valuation.
7. Where sweat equity shares are issued for a non-cash consideration on the basis of a valuation report in respect thereof obtained from the registered valuator, such non-cash consideration shall be treated in the following manner in the books of account of the company-

• where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the accounting standards; or
• Where clause (a) is not applicable, it shall be expensed as provided in the accounting standards.

8. The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purposes of sections 197 and 198 of the Act, if the following conditions are fulfilled, namely.-

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

9. In respect of sweat equity shares issued during an accounting period, the accounting value of sweat equity shares shall be treated as a form of compensation to the employee or the director in the financial statements of the company, if the sweat equity shares are not issued pursuant to acquisition of an asset.
10. If the shares are issued pursuant to acquisition of an asset, the value of the asset, as determined by the valuation report, shall be carried in the balance sheet as per the Accounting Standards and such amount of the accounting value of the sweat equity shares that is in excess of the value of the asset acquired, as per the valuation report, shall be treated as a form of compensation to the employee or the director in the financial statements of the company.
11. The Board of Directors shall, inter alia, disclose in the Directors Report for the year in which such shares are issued, the following details of issue of sweat equity shares namely:-

• The class of directors or employees to whom sweat equity shares was 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 allot tees holding one percent 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 pricing formula
• The total number of shares arising as a result of issue of sweat equity shares
• The percentage of the sweat equity shares of the total post issued and paid up 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 issuance of sweat equity shares

The company shall maintain a Register of Sweat Equity Shares in Form No. SH.3 and shall forthwith enter therein the particulars of Sweat Equity Shares issued under section 54.

• The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide
• The entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose