Meaning: Sweat equity shares are equity shares issued by a company to its employees or directors at a discount, or as a consideration for providing know-how or a similar value to the company.
Procedure and conditions to be fulfilled to issue Sweat Equity Shares:
A company may issue sweat equity shares of a class of shares already issued if these conditions are met:
a. The issue of sweat equity shares should be authorised by a special resolution passed by the company in a general meeting.
b. The resolution should specify the number of shares, current market price, consideration, if any, and the section of directors /employees to whom they are to be issued.
c. A separate resolution should be passed if the shares to be issued (during any one year, to identified employees and promotes) is equal to or exceeds 1% of the issued capital (excluding outstanding warrants and conversion) as stood on the day of grant of sweat equity shares
d. The Explanatory Statement should include the following details:
i. The date of the meeting;
ii. Reasons/justification for the issue;
iii. The number of shares, consideration for such shares and the class or classes of persons to whom such equity shares are to be issued;
iv. The value of the sweat equity shares along with valuation report/ basis of valuation and the price at the which the sweat equity shares will be issued;
v. The names of persons to whom the equity will be issued and the person's relationship with the company;
vi. Ceiling on managerial remuneration, if any, which will be affected by issuance of such equity;
vii. A statement to the effect that the company shall conform to the accounting policies specified by the Central Government; and
viii. Diluted earning per share pursuant to the issue of securities to be calculated in accordance with the Accounting Standards specified by the Institute of Chartered Accountants of India.
e. As on the date of issue, a year should have elapsed since the company was entitled to commence business.
Listed Company: on Recognized Stock Exchanges
a. SEBI (Issue of Sweat Equity) Regulations, 2002 has to be followed to issue sweat equity shares.
Listed Company: on Unrecognized Stock Exchanges
a. Sweat equity shares can be issued in accordance with such guidelines as may be prescribed.
b. SEBI also prescribes the accounting treatment of sweat equity shares. Thus, sweat equity is expensed, unless issued in consideration of a depreciable asset, in which case it is carried to the balance sheet.
a. Unlisted Companies (Issue of Sweat Equity) Rules, 2003 has to be followed
b. Sweat equity shares cannot be issued before one year of commencement of operations.
c. Unlisted companies cannot issue more than 15 percent of the paid-up capital in a year or shares with a value of more than Rs 5 crores - whichever is higher - except with the prior approval of the central government. If the sweat equity is being issued for consideration other than cash, an independent valuer has to carry out an assessment and submit a valuation report.
d. The company should also give 'justification for the issue of sweat equity shares for consideration other than cash, which should form a part of the notice sent for the general meeting'.
e. The board of directors' decision to issue sweat equity has to be approved by passing a special resolution at a shareholders' meeting later in the year. The special resolution must be passed by 75 percent of the members attending voting for it.
f. Sweat equity shares are no different from employee stock options with a one year vesting period. It is essential when a company is formed, to assure the financial investors that the knowhow providers will stay on, or for a start-up with limited resources to attract highly-qualified professionals to join the team as long-term stakeholders.
g. These shares are given to a company's employees on favourable terms, in recognition of their work. Sweat equity usually takes the form of giving options to employees to buy shares of the company, so they become part owners and participate in the profits, apart from earning salary.
h. Section 79A of the Companies Act lays down conditions for the issue of sweat equity shares.
Lock in period:
The Sweat Equity Shares issued shall be locked in for a period of three years from the date of allotment.
Issue of Sweat Equity for a consideration other than Cash
If the sweat equity is issued for consideration other than cash, then company shall comply with following:
- The valuation of the intellectual property or of the know-how provided or other value addition to consideration at which sweat equity capital is issued, shall be carried out by a valuer;
- The valuer shall consult such experts, as he may deem fit, having regard to the nature of the industry and the nature of the property or the value addition;
- The valuer shall submit a valuation report to the company giving justification for the valuation;
- A copy of the valuation report of the valuer shall be sent to the shareholders with the notice of the general meeting;
- The company shall give justification for issue of sweat equity shares for consideration other than cash, which shall form part of the notice sent for the general meeting; and
- The amount of Sweat Equity shares issued shall be treated as part of managerial remuneration .
Placing of Auditors Report before the Annual General Meeting.
In the General meeting subsequent to the issue of sweat equity, the Board of Directors shall place before the shareholders, a certificate from the auditors of the company that the issue of sweat equity shares has been made in accordance with the Regulations and in accordance with the resolution passed by the company authorizing the issue of such Sweat Equity Shares.
Disclosure in Director's Report:
The Board of Directors, shall, inter alia, disclose either in the Directors' Report or in the annexure to the Director's Report. Disclosure to include number of shares to be issued, conditions for issue, pricing formula, the total number of shares arising as a result of issue, money realised or benefit accrued to the company, diluted Earnings per Share (EPS) pursuant to issuance of sweat equity shares.
The company shall maintain a specified register
A certificate of compliance (with the rules framed by the authorities) duly signed by the auditors or practising company secretary should be placed before the shareholders at the annual general meeting.