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Sweat Equity Shares

sivaram (Asst Mgr-Taxation) (6918 Points)

19 August 2009

1.What is meant by sweat equity shares? what are the provisions governing the same

2what are the advantages of going for stock splits

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(Guest)

Sweat equity shares are the ones given to the employees / people who have been largely involved in building the company from scratch. They do not put any money in the business, but are given the shares as a reward.

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 19 August 2009

Hi,

The expression “sweat equity shares” refers to 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 similar value additions to the company.

All the limitations, restrictions and provisions relating to equity shares are applicable to such sweat equity shares. A company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled

(a) the issue of sweat equity shares is authorised by 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. (In case of a company whose equity shares are not listed on any recognised stock exchange, the sweat equity shares can be issued in accordance with such guidelines as may be prescribed.)

All these provisions are laid down in section 79 A of the Companies Act, 1956. This section was inserted by the Companies (Amendment) Act 1999 which provided for issue of sweat equity shares subject to fulfillment of certain conditions.

The Companies (Amendment) Act, 2000 laid down that the provisions of this section are to be administered by SEBI in respect of companies already listed or companies, which intend to get listed. In respect of other companies, the administration shall be by the Central Government.

Regards

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 19 August 2009

Advantages of stock split to Investors

There are plenty of arguments over whether a stock split is an advantage or disadvantage to investors. One side says a stock split is a good buying indicator, signaling that the company's share price is increasing and therefore doing very well. This may be true, but on the other hand, you can't get around the fact that a stock split has no affect on the fundamental value of the stock and therefore poses no real advantage to investors. Despite this fact the investment newsletter business has taken note of the often positive sentiment surrounding a stock split. There are entire publications devoted to tracking stocks that split and attempting to profit from the bullish nature of the splits. Critics would say that this strategy is by no means a time-tested one and questionably successful at best.