Introduction

Employees are the backbone of any business as their diligence and hard work play a crucial role in the growth of any business. Many companies appreciate their employees and reward them in different ways. Rewarding employees motivates them to contribute more to the growth of the business. Sweat equity shares is one such reward which are issued by a company to its employees or directors of at a discounted rate or consideration other than cash. The shares are given in exchange for a value-addition, whether in terms of providing technical know-how or through Intellectual Property Right, by an employee or director.

Sweat Equity Shares

Sweat equity shares can only be issued by a company to its Directors or Employees, at a discount or for a consideration other than cash, for their providing of know-how or creation of intellectual property rights like trademark, patent, copyright or value additions. Sweat equity shares can be issued to:

As per Sec 2(88) of Companies Act, 2013, sweat equity shares” means such equity shares as are issued by a company to its Directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called

• Permanent employee of the company who has been working in India or outside India, for atleast the last one year;
• Director of the company, whether a whole time Director or not;
• Employee or Director above of a subsidiary of the company, in India or outside india, or of a holding company of the company.

The Reasons of issuing Sweat Equity Shares: –

• Remarkable contribution and efforts of an employee or a director in completion of any project
• Technical expertise in the field
• Value addition to the company through extraordinary contribution and gaining intellectual property rights

NOTE: Value additions mean actual or anticipated economic benefits derived or to be derived by the Company from an Expert or Professional from providing know-how or making available rights in the nature of intellectual property rights. For sweat equity shares to be issued, the employee’s renumeration for value addition should not have been paid or included in the normal remuneration payable, under the contract of employment or monetary consideration payable under any other contract.

Applicable provisions of Companies Act, 2013: –

Managerial Remuneration category:-

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:-

• Sweat Equity Shares are issued to any director or manager
• 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

Accounting treatment aspect for asset acquisition cases:

1. 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
2. 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

STEP WISE PROCEDURE TO ISSUE AND ALLOT SWEAT EQUITY SHARES STEPS ACTION TIMELINES

1. Pass Board Resolution for issuance of Sweat Equity Shares by considering following agenda:

• of Sweat Equity Shares (ranking pari-passu to existing equity shares)
• Name of Director or employee (proposed allottees)
• Grounds of issuance (justification to issue Sweat Equity shares)
• Appointment of Registered Valuer
• Price per share
• Class of proposed shares
• Lock-in period (minimum 3 years)
• Approval of EGM Notice Notice- at least 7 working days in advance or   Shorter Notice(with consent of all Directors)

2. Pass Special Resolution + Explanatory Statement in EGM by considering following:-

• the date of the Board meeting at which the proposal for issue of sweat equity shares was approved
• the reasons or justification for the issue
• the class of shares under which sweat equity shares are intended to be issued (pari- passu to existing Equity shares)
• the total number of shares to be issued as sweat equity
• the class or classes of directors or employees to whom such equity   shares are to be issued
• the principal terms and conditions on which sweat equity shares are to be issued, including basis of valuation
• the time period of association of such person with the company
• the names of the directors or employees to whom the sweat equity shares will be issued and their relationship with the promoter or/and Key Managerial Personnel
• the price at which the sweat equity shares are proposed to be issued
• the consideration including consideration other than cash, if any to be received for the sweat equity
• 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 Notice:- at least 21 clear days or shorter Notice+ Consent for shorter notice(95% shareholding)

Valuation criteria:-

1. Pricing:- The price of the sweat equity shares shall be determined by a Registered Valuer as the fair price giving justification for such valuation
2. Valuation of IPR/Know-how/Value Addition:-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 Valuer, who shall provide a proper report addressed to the Board of directors with justification for such valuation
3. Valuation Report for Pricing and IPR/Value Addition/know-how shall be sent to Shareholders with notice of EGM
4. Criteria for Issuance on Non-Cash Basis:-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 valuer, such non-cash consideration shall be treated in the following manner in the books of account of the company:-
5. 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
6. where clause (a) is not applicable, it shall be expensed as provided in the accounting standards

FILINGS WITH ROC AS PER COMPANIES ACT,2013

1. File MGT-14 form to ROC with following attachments: –
2. CTC of SR
3. Notice of EGM and Shorter Notice Consent within 30 days from the date of passing SR

The following explanatory statements need to be attached to the notice of meeting for passing special resolution:

• Date of Board meeting at which the proposal for issue of sweat equity shares was approved;
• The reason or justification for the issue;
• The class of shares under which sweat equity shares are intended to be issued;
• The total number of shares to be issued as sweat equity;
• The class or classes of Directors or employees to whom such equity shares are to be issued;
• Principal terms and conditions on which sweat equity shares are to be issued, including basis of valuation;
• Time period of association of such person with the company;
• The name and details of the Directors or Employees to whom the sweat equity shares will be issued and their relationship to Promoters / Key Managerial personnel of the company;
• Price at which sweat equity shares are proposed to be issued;
• Consideration including consideration other than cash, if any to be received for the sweat equity;
• Details of ceiling on managerial renumeration, if any, be breached by issuance of such sweat equity and how is it proposed to be dealt with;
• 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 securities, calculated in accordance with the applicable accounting standards;

1. Pass Board Resolution for Allotment of Sweat Equity Shares by considering following agenda:-
2. Basis of Valuation of shares
3. Lock-in period

• Authorisation to authorised signatories for post- allotment filings

1. No. of shares, List of allottees
2. Price per share within 12 months from the date of passing Special Resolution

• File PAS-3 form to ROC with following attachments:-

1. CTC of BR of allotment
2. List of allottees

• PAS-5 (Record of allottees) within 15 days from the date of

1. PAS-5 (Record of allottees) within 15 days from the date of allotment 7 Issue of Share Certificates containing a BOLD Statement for Lock-in Period within 60 days from the date of allotment
2. Stamp Duty payment as per Indian Stamp Act within 30 days from the date of issuance of Share Certificates
3. Entry in SH-3 Registers at the time of allotment

PENALTY

There is no direct penal provision if any company and directors has failed to follow the provision of sweat equity share. Nonetheless, the common section for punishment under the Companies Act, 2013 in cases where no specific punishment or penalty is provided shall be considered. In such case if a company or any of its officer’s or any other person contravenes any provision of the Act or any condition or limitation that is subject to any approval or sanction and for which no punishment or penalty is given anywhere else in this Act.

In such cases, the company and every director or officer of the company who is in default or failed to follow the rules shall be punished with fine which can extend to ten thousand rupees and in case the contravention is a continuing one, the fine shall further extend to one thousand rupees for each day till the contravention continues.

Conclusion

The issue of the Sweat Equity share is treated as a salary for the employees, and they welcome it as an appreciation. Further, Sweat Equity Shares are taxable in the hands of the employee under the Income Tax Act 1961. This sovereignty to the employees helps in maintaining a healthy work culture for the company hence driving high revenue for the company.