{"id":6150,"date":"2019-08-29T18:39:09","date_gmt":"2019-08-29T13:09:09","guid":{"rendered":"https:\/\/swaritadvisors.com\/learning\/?p=6150"},"modified":"2020-06-25T12:00:01","modified_gmt":"2020-06-25T06:30:01","slug":"procedure-for-issue-of-sweat-equity-shares-in-india","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/learning\/procedure-for-issue-of-sweat-equity-shares-in-india\/","title":{"rendered":"Procedure for Issue of Sweat Equity Shares in India"},"content":{"rendered":"\n<p class=\"has-drop-cap\">Sweat Equity Shares are issued by the Company to give recognition to its employees for their work. It is one of the methods through which the Company makes the share-based payment to its employees. <strong>Sweat equity shares<\/strong> is a reward given to employees for their contribution to the development of the Company. <strong>Equity Shares<\/strong> encourages an employee to work for the benefit of the company by encouraging them for their stake and helps the company to retain its employees for a long period. <\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a3a61b26aa5e\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a3a61b26aa5e\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/learning\/procedure-for-issue-of-sweat-equity-shares-in-india\/#Defining_Sweat_Equity_Share_as_per_the_Companies_Act_2013\" title=\"Defining Sweat Equity Share as per the Companies Act, 2013\">Defining Sweat Equity Share as per the Companies Act, 2013<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/learning\/procedure-for-issue-of-sweat-equity-shares-in-india\/#Eligibility\" title=\"Eligibility\">Eligibility<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/learning\/procedure-for-issue-of-sweat-equity-shares-in-india\/#Conditions_to_be_fulfilled_for_the_issue_of_Sweat_Equity_Shares\" title=\"Conditions to be fulfilled for the issue of Sweat Equity Shares\">Conditions to be fulfilled for the issue of Sweat Equity Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/learning\/procedure-for-issue-of-sweat-equity-shares-in-india\/#Quantum_for_Issue_of_Sweat_Equity_Shares\" title=\"Quantum for Issue of Sweat Equity Shares\">Quantum for Issue of Sweat Equity Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/learning\/procedure-for-issue-of-sweat-equity-shares-in-india\/#Procedure_for_the_Issue_of_Sweat_Equity_Share\" title=\"Procedure for the Issue of Sweat Equity Share\">Procedure for the Issue of Sweat Equity Share<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/learning\/procedure-for-issue-of-sweat-equity-shares-in-india\/#Pricing_of_an_Issue\" title=\"Pricing of an Issue\">Pricing of an Issue<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/swaritadvisors.com\/learning\/procedure-for-issue-of-sweat-equity-shares-in-india\/#Post-issue_Disclosure\" title=\"Post-issue Disclosure\">Post-issue Disclosure<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/swaritadvisors.com\/learning\/procedure-for-issue-of-sweat-equity-shares-in-india\/#Benefits_of_Sweat_Equity_for_Employees\" title=\"Benefits of Sweat Equity for Employees\">Benefits of Sweat Equity for Employees<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/swaritadvisors.com\/learning\/procedure-for-issue-of-sweat-equity-shares-in-india\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Defining_Sweat_Equity_Share_as_per_the_Companies_Act_2013\"><\/span>Defining Sweat Equity Share as per the Companies Act, 2013<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong><em>As per Section 2(88) of Companies Act, 2013<\/em><\/strong>, Sweat Equity Shares means equity shares issued by a company to its director or employee at discount or for consideration other than cash, for providing know-how or making available like <strong>intellectual property rights<\/strong> or value addition. \u00a0<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Eligibility\"><\/span>Eligibility<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>Following are eligible for sweat equity shares:<\/em><\/p>\n\n\n\n<ul><li>Permanent employee of the Company. Such employees must be working either in India or Outside India for at least 1 year.<\/li><li><strong>Permanent employee of the subsidiary<\/strong> or a holding company working in a Company for more than 1 year.           <\/li><li>Director of the company excluding Independent director<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conditions_to_be_fulfilled_for_the_issue_of_Sweat_Equity_Shares\"><\/span>Conditions to be fulfilled for the issue of Sweat Equity Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>Following are the conditions to be fulfilled by the company before issuing sweat equity shares:<\/em><\/p>\n\n\n\n<ul>\n<li>A special resolution shall be passed for authorizing the issue of sweat equity share.<\/li>\n<li>Listed companies need to follow provisions of <a href=\"https:\/\/swaritadvisors.com\/learning\/category\/sebi-advisory\/\" target=\"_blank\" rel=\"noreferrer noopener\">SEBI<\/a> for issue &amp; unlisted company can issue as per <a href=\"http:\/\/www.mca.gov.in\/SearchableActs\/Section54.htm\" target=\"_blank\" rel=\"noreferrer noopener\">Section 54 of Companies Act, 2013<\/a>.<\/li>\n<li>Sweat equity shares can be issued by the company only after the expiry of one year from the date of commencement of business.<\/li>\n<li>The company can issue sweat equity shares up to the higher of two:\n<p>\u2022 15% of existing paid-up share capital<\/p>\n<p>\u2022 INR 5 Crore.<\/p>\n<p>Subject to 25% of the paid capital of the Company.<\/p>\n<\/li>\n<li>The sweat equity shares shall be issued with a lock-in period of three years.<\/li>\n<li>Mention the fact that shares are locked-in along with the expiry of the lock-in period in the share certificate.<\/li>\n<li>Shares issued at a fair price that is valued by a registered valuer.<\/li>\n<li>Amount of sweat equity shares can be treated as managerial remuneration if it fulfills the following condition:\n<p>\u2022 It is issued to the director or manager<\/p>\n<p>\u2022 They are issued for non-cash consideration<\/p>\n<\/li>\n<li>The details of issue &amp; allotment of sweat equity shares shall be mentioned in the board report along with the following details:\n<p>\u2022 Class of directors<\/p>\n<p>\u2022 Class of shares<\/p>\n<p>\u2022 Number of shares issued<\/p>\n<p>\u2022 The formula used for valuation<\/p>\n<p>\u2022 Percentage of sweat equity of the total post-issue paid-up capital<\/p>\n<p>\u2022 Consideration received or benefits to the company from the issue.<\/p>\n<\/li>\n<li>In case the shares are issued for non-cash consideration, it shall be treated in the books of account of a company:\n<p>\u2022 When it takes the form of a depreciable asset, it shall be carried to the balance sheet.<\/p>\n<p>\u2022 In other cases, it is treated as expenses as per accounting standard.<\/p>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Quantum_for_Issue_of_Sweat_Equity_Shares\"><\/span>Quantum for Issue of Sweat Equity Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>Following are the limits for the issue of sweat equity share:<\/em><\/p>\n\n\n\n<ol><li>The issue cannot exceed the higher of the following: <\/li><li>15% of existing <strong>paid-up equity capital<\/strong><ul><li><strong>Issue value of INR 5 Crore<\/strong><\/li><li>Issue cannot exceed 25% of the paid-up equity capital at any time. <\/li><\/ul><\/li><li>For the new start, the company issue cannot be <strong>more than 50%<\/strong> of its <strong>paid-up capital for 5 years<\/strong> from the date of incorporation.<br> <\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Procedure_for_the_Issue_of_Sweat_Equity_Share\"><\/span>Procedure for the Issue of Sweat Equity Share<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Following is the <strong>step-by-step procedure<\/strong> for the <strong>issue of sweat equity shares<\/strong>:<\/p>\n\n\n\n<ul><li>Call &amp; convene the board meeting with at least 7 days notice for discussing following agendas:<ul><li>Consideration of proposal of <strong>issue of sweat equity shares<\/strong><\/li><li>\u00a0Fixing up the date, day, time, venue &amp; agenda for calling the EGM<\/li><\/ul><\/li><li>An unlisted public company has to issue the <strong>notice for a general meeting<\/strong> at least 21 clear days before the date of the meeting. It can be called at shorter notice with the <strong>consent of 95% of shareholders<\/strong> is received for the same.<\/li><li>The <strong>explanatory statement<\/strong> shall be annexed with a notice which shall contain the following details:           <ul><li>Date of <strong>Board Meeting for approving<\/strong> the proposal<\/li><li>Reasons for such an issue<\/li><li>Class of shares to be issued<\/li><li>Total number of shares to be issued<\/li><li>Class of the <strong>directors\/employees<\/strong> to whom such shares are proposed to be issued<\/li><li>Price at which sweat equity is issued<\/li><li>Consideration or <strong>non-consideration received<\/strong> for the issue of sweat equity share<\/li><li>A statement declaring that the company will follow the applicable accounting standard.<\/li><li>Diluted EPS after the issue of shares <\/li><li>Principle terms &amp; conditions for such issue<\/li><\/ul><\/li><li>Hold and convene the proper executed <strong>General meeting<\/strong> and pass the necessary resolution for the approval of the issue of sweat equity share.            <\/li><li>Within 30 days of passing the resolution, <strong>file form MGT-14<\/strong> with Registrar intimating the registrar of the passing of the resolution.           <\/li><li>After the <strong>resolution is filed<\/strong>, call the next board meeting for the allotment of sweat equity shares.        <\/li><li>After passing the resolution for <strong>allotment of shares<\/strong>, <strong>file form PAS-3<\/strong> with the registrar within 30 days of passing board resolution.<\/li><li>The company shall maintain the register after allotment of shares. Such <strong>register of sweat equity<\/strong> shares shall be maintained in form SH-3 with all the details &amp; particulars of Sweat equity shares.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Pricing_of_an_Issue\"><\/span>Pricing of an Issue<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The <strong>price of an issue<\/strong> shall be the value based on the price determined by a <strong>registered valuer<\/strong> as to the fair price. He shall justify reaching a <strong>certain value<\/strong>. The registered valuer shall carry the valuation of <\/p>\n\n\n\n<ul><li>Know-how <\/li><li>Intellectual property rights<\/li><li>Value addition for the sweat equity <\/li><\/ul>\n\n\n\n<p>Along with that, he needs to give certified reports addressed to the board with <strong>proper justification &amp; clarification<\/strong> for reaching out to the fair value for an issue. This report needs to be sent to all the <strong>shareholders as an attachment<\/strong> with the <strong>notice of the general meeting<\/strong>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Post-issue_Disclosure\"><\/span>Post-issue Disclosure<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Following disclosure are required to be <strong>disclosed in the board\u2019s report<\/strong> for the year in which <strong>issue is made<\/strong>:<\/p>\n\n\n\n<ul><li>Class of directors\/employees to whom shares were issued<\/li><li>Class of shares issued<\/li><li>A total number of <strong>shares issued to directors<\/strong>, employees, KMP<\/li><li>Bifurcation of the <strong>shares issued for cash consideration<\/strong> and <strong>non-cash consideration<\/strong><\/li><li>Reason for the <strong>sweat equity issue<\/strong><\/li><li>Terms &amp; conditions under which issue is made along with the <strong>pricing formula used<\/strong>.<\/li><li>Percentage of the <strong>sweat equity shares<\/strong> of the total <strong>post-issue capital<\/strong> <\/li><li>Diluted EPS<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Benefits_of_Sweat_Equity_for_Employees\"><\/span>Benefits of Sweat Equity for Employees<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Companies those incentivizes their employee by <strong>issuing sweat equity gets<\/strong> the benefit of both the growth of its business along with the quality of work from their employees. From the employer&#8217;s point of view, <strong>sweat equity shares help<\/strong> to keep their employees faithful towards the company for a longer period, as <strong>shares are issued<\/strong> with the <strong>lock-in period of 3 years<\/strong>. However, <strong>sweat equity shares<\/strong> are taxable in the hands of employees. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><div class\"shadow4\"=\"\">Certain limits have to be kept in mind by a company for the issue of sweat equity shares as there is a limitation imposed on the new startup as they can issue up to 50% of the paid-up capital. Sweat Equity is treated as a salary and under Income Tax Act 1961, they are taxable as a prerequisite. Thus an employer willing to pay to its employee sweat equity then deals is acceptable by the company if restricted limits are followed.<br> <\/div><\/p>\n\n\n\n<div class=\"read\"><p><b>Also, Read:<\/b> <mark><a href=\"https:\/\/swaritadvisors.com\/learning\/advantages-and-disadvantages-of-public-issue-a-complete-guide\/\" target=\"_blank\" rel=\"noopener noreferrer\">Advantages and Disadvantages of Public Issue<\/a><\/mark>.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Sweat Equity Shares are issued by the Company to give recognition to its employees for their work. It is one of the methods through which the Company makes the share-based payment to its employees. Sweat equity shares is a reward given to employees for their contribution to the development of the Company. Equity Shares encourages [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":6165,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1,546],"tags":[547,551],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/6150"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/comments?post=6150"}],"version-history":[{"count":17,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/6150\/revisions"}],"predecessor-version":[{"id":11258,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/6150\/revisions\/11258"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media\/6165"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media?parent=6150"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/categories?post=6150"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/tags?post=6150"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}