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Checklist for the Issue of Sweat Equity Shares for Unlisted Companies

[Section 79A and Unlisted Companies (Sweat Equity Shares) Rules, 2003]

Ø  Pre Requirement

 

1.    Atleast one year has elapsed since the date of Commencement of Business by Company before issue of Sweat equity shares.

 

2.    The company shall not issue sweat equity shares for more than 15% of total paid up equity share capital in a year or shares of the value of 5 crores of rupees, whichever is higher except with the prior approval of the Central Government in Form 65

 

3.    Sweat Equity shares are shares only of a class already issued by the Company

 

Ø  Other Provisions

 

4.    Call Board Meeting for calling EGM for the issue of Sweat Equity Shares

 

5.    The Explanatory Statement should include the following details:

 

(i)     the date of the meeting at which the proposal for issue of sweat equity shares was approved by the Board of Directors of the company;

 

(ii)    the 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 alongwith 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.

 

6.    If, Shares are issued at Discount than approval of Central Government need to be taken as per Section 79.

 

7.    Approval of shareholders by way of separate resolution in the general meeting shall be obtained by the company in case of grant of shares to identified employees and promoters, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversion) of the company at the time of grant of the sweat equity shares.

 

8.    Get approval of Members by passing Special  Resolution stating the following details:

a.    No. of Shares

b.    Current Market Price

c.    Consideration

d.    Classes of Directors or employees to whom the equity shares will be issued (employee includes Executive Director)

 

9.    The Board of Directors, shall, inter alia, disclose either in the Directors' Report or in the annexure to the Director's Report, the following details of issue of sweat equity shares :-

a.    Number of shares to be issued to the employees or the directors;

b.    conditions for issue of sweat equity shares;

c.    the pricing formula;

d.    the total number of shares arising as a result of issue of sweat equity shares;

e.    money realised or benefit accrued to the company from the issue of sweat equity shares;

f.     Diluted Earnings per Share (EPS) pursuant to issuance of sweat equity shares. 

 

10. Pricing of Sweat Equity Shares:- The price of sweat equity shares to be issued to employees and directors shall be at a fair price calculated by an independent valuer.

 

11. Lock-in of sweat equity shares:- Sweat equity shares issued to employees or directors shall be locked in for a period of three years from the date of allotment.

 

12. Maintain the Register of Sweat Equity Shares as per Format of the Rules as

S.No.

Folio No. / certificate No.

Date of passing of resolution

Date of issue of sweat equity shares

1

2

3

4

 

Name of the allottee

Status of the allottee - whether director or employee

Reference to entry in register of members

Number of sweat equity shares issued

5

6

7

8

 

Face value of the share

Price at which shares issued

Total consideration paid by employee/director

Lock in period till which date

9

10

11

12

 

13. Where shares are allotted as per the Unlisted Companies (Sweat Equity Shares) Rules, 2003, the Board shall place before the annual general meeting a certificate from the auditors of the Company or PCS that sweat equity shares have been allotted in accordance with the resolution of the company in the general meeting and these Rules.

 

14. Issue at Consideration other than cash: Where a company proposes to issue sweat equity shares for consideration other than cash, Company shall comply with following :

 

(a)  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;

 

(b)  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;

 

(c)  the valuer shall submit a valuation report to the company giving justification for the valuation;

 

(d)  a copy of the valuation report of the valuer shall be sent to the shareholders with the notice of the general meeting;

 

(e)  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

 

(f)   the amount of Sweat Equity shares issued shall be treated as part of managerial remuneration for the purposes of sections 198, 309, 310, 311 and 387 of the Companies Act, 1956 if the following conditions are fulfilled:

             i)        the Sweat Equity shares are issued to any director or manager; and,

 

                  ii)            they are issued for non-cash consideration, which does not take the form of an asset which can be  carried to the balance sheet of the company in accordance with the relevant accounting standards.

 

15. Accounting policies:-

 

(a)  Where the sweat equity shares are issued for a non-cash consideration, such non-cash consideration shall be treated in the following manner in the books of account of the company:

 

               i)        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 relevant accounting standards; or

 

              ii)        where clause (a) is not applicable, it shall be expensed as provided in the relevant accounting standards. 

 

(b)  In respect of sweat equity shares issued during accounting period, the accounting value of sweat equity shares shall be treated as another form of compensation to the employee or the director in the financial statement of the company.

 

 

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