Sweat equity shares

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Savita

Savita (Querist)
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03 April 2010 What is meant by sweat equity shares? Which section is applicable for it?

Thank you.

CS Vandana Kacholia

CS Vandana Kacholia (Expert)
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03 April 2010 Section 79A. Issue of sweat equity shares:

(1) Notwithstanding anything contained in section 79, a company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled, namely:-
(a) the issue of sweat equity shares is authorised by a special resolution passed by the company in the general meeting;
(b) the resolution specifies the number of shares, 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 the issue elapsed since the date on which the company was entitled to commence business;
(d) the sweat equity shares of a company whose equity shares are listed on a recognised stock exchange are issued in accordance with the regulations made by the Securities and Exchange Board of India in this behalf;
Provided that in the case of a company whose equity shares are not listed on any recognised stock exchange, the sweat equity shares are issued in accordance with the guidelines as may be prescribed.
Explanation I.- For the purposes of this sub-section, the expression "a company" means the company incorporated, fanned and registered under this Act and includes its subsidiary company incorporated in a country outside India.
Explanation II.- For the purposes of this Act, the expression "sweat equity shares" means equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.
(2) All the limitations, restrictions and, provisions relating to equity shares shall be applicable to such sweat equity shares issued under sub-section (1).]
141[Issue and redemption of preference shares]

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Savita

Savita (Querist)
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03 April 2010 Please further explain the
'Explanation-II' above (specially the phrases "consideration other than cash for providing know-how" and "making available rights in the nature of intellectual property rights or value additions" ).

Rasesh

Rasesh (Expert)
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04 April 2010 Please also refer: Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003.

The above explanation in simple words would mean equity shares given to the 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.

ESOP or employee stock option plan, or employee share ownership plan, is how sweat equity may often operate. ESOS is another abbreviation, to mean Employees Stock Option Scheme, and there can be ESPS, or Employee Stock Purchase Plan. On www.incometaxindia.gov.in, there is a simple description of ESOP as "the generic term for a basket of instruments and incentive schemes that find favour with the new upward mobile salary class and which are used to motivate, reward, remunerate and hold on to achievers."

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Savita

Savita (Querist)
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04 April 2010 Thank you very much sir.

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