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Sweat equity shares and its procedure to issue by unlisted companies

Gaurav Jain 
on 09 March 2017

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Meaning of "Sweat Equity Shares" (Section 2(88)): 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.

'Value additions' means actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights, by such person to whom sweat equity is being issued for which the consideration is not paid or included in the normal remuneration payable under the contract of employment, in the case of an employee. (Explanation (ii) of Rule 8(1) of the Companies (Share Capital and Debentures) Rules, 2014

Text of the provision of Section 54: (1)Notwithstanding anything contained in section 53 (Prohibition on issue of shares at discount), a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely-

(a) the issue is authorized by a special resolution passed by the company;

(b) the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;

(c) not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business; and

(d) where the equity shares of the company are listed on a recognized stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.

(2) The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank pari passu with other equity shareholders.

Key Considerations:

1. Board Resolution for considering the issue of sweat equity shares cannot be passed by circulation. (S.179 (3)(c).

2. In case of a listed Company, the sweat equity shares shall be issued in accordance with the regulations made by the Securities and Exchange Board in this behalf. The unlisted Companies can issue such shares in accordance with the procedure explained below. [Section 54(1) (d)]

3. Company can issue sweat equity shares only after the expiry of one year, since the date on which the company was entitled to commence business. [Section 54(1)(c)]

4. The company shall not issue sweat equity shares for more than 15% of the existing paid up equity share capital in a year or shares of the issue value of Rupees 5 crores, whichever is higher.Further, the issuance of sweat equity shares in the Company shall not exceed 25% of the paid up equity capital of the Company at any time. [Rule 8(4) of the Companies (Share Capital and Debentures) Rules, 2014]

3. Sweat equity shares are permitted to be issued to the following category of employees as per Explanation to Rule 8(1) of Companies (Share Capital and Debentures) Rules, 2014-

(a) a permanent employee of the company who has been working in India or outside India, for at least last one year; or

(b) a director of the company, whether a whole time director or not; or

(c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company;

The following procedure is to be followed for Issue of Sweat Equity Shares by an Unlisted Company, Click:- Issue of Sweat Equity Shares by Company


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