SWEAT EQUITY SHARES

Sweat Equity Shares [Section 2(88)]: Sweat equity shares means equity shares issued by a company to its directors or employees 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.

Issue of sweat equity shares [Section 54]: A company can issue sweat equity shares, of a class of shares already issued, if the following conditions are satisfied:
(1) The issue has been authorized by a special resolution passed by the company in the general meeting.

(2) Such special resolution should clearly specify:
-Number of shares
-Current market price
-Consideration and
-Classes of directors or employees to whom such equity shares are to be issued.

(3) At least 1 year should have elapsed from the date on which the company was entitled to commence business.

(4) A company whose shares are listed on a recognized stock exchange issuing sweat equity shares should comply with the SEBI (Issue of Sweat Equity) Regulations, 2002.

(5) A company whose shares are not so listed should comply with the Companies (Share Capital & Debentures) Rules, 2014. 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 and the holders of sweat equity shares shall rank pari passu (on an equal footing) with other equity shareholders. (Section 54 (2)). Register of Sweat Equity Shares [Rule 8 (14) of the Companies (Share Capital & Debentures) Rules, 2014]: The company shall maintain a Register of Sweat Equity Shares in Form No. SH. 3 and shall forthwith enter therein the particulars of issue of sweat equity shares. The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide. The entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.

Provisions of the Companies (Share Capital & Debentures) Rules, 2014 relating to sweat equity shares are as follows:
(1) Explanatory statement to contain certain particulars [Rule 8(2)]: The explanatory statement to be annexed to the notice of the general meeting shall contain the prescribed content like the date of the board meeting reasons or justification for the issue: the class of shares under which sweat equity shares are intended to be issued; total number of
shares, etc.

(2) Validity of special resolution [Rule 8(3)]: The special resolution shall be valid for making the allotment up to period of 12 months.

(3) Limits on issue of sweat equity shares [Rule 8(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 5 Crores, whichever is higher. The issuance of sweat equity shall not exceed 25% of the paid up equity capital at any time.

(4) Lock-in-period [Rule 8(5)]: The sweat equity shares issued to directors or employees shall be locked in for a period of 3 years from the date of allotment and this fact shall be stamped in bold on the share certificate.

(5) Valuation Aspects [Rule 8(6) & (7) & (81] The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as the fair price giving justification for such valuation. The valuation of intellectual property rights or of know how or value additions shall be carried out by a registered valuer. A copy of the valuation report shall be sent to the shareholders with the notice of the
general meeting.

(6) Sweat equity shares and compensation aspects [Rule 8(11) & (12)]:
(i) If the sweat equity shares issued pursuant to no acquisition of an asset. The accounting value (fair value) of sweat equity shares shall be treated as a form of compensation to the employee or the director in the financial statements.
(ii) If the shares are issued pursuant to acquisition of an asset: The value up to valuation report shall be carried in the balance sheet as per the Accounting Standards and such excess value over the value as per valuation report shall be treated as a form of compensation to the employee or the director in the financial statements of the company.

(7) Disclosure in Board's Report [Rule 8(13)]: The details of issue of sweat equity shares shall be disclosed in the Directors Report for the year.

(8) Maintenance of Register [Rule 8(14)]: The company shall maintain a Register of Sweat Equity Shares in Form No. SH. 3. The Register shall be maintained at the registered office of the company or such other place as the Board may decide. The entries in the register shall be authenticated by the Company Secretary or by any other person authorized by the Board.