FAQs on Sweat Equity Shares– Complete Prospective
Q 1. Explain concept of Sweat Equity shares:-
Sweat equity shares is as valuable as Cash equity. As per section 2(88) of the companies act, 2013 ‘Sweat Equity shares‘ are issued by a company to its Directors or employees at a discount or for consideration, other than cash, for providing their knowhow of making available rights in the nature of Intellectual propery rights or value additions.
Q 2. Who are covered under the sweat equity scheme?
- Directors- Whether a whole time director or not of the company, Company includes Subsidiary and holding as well.
- Employees- Permanent employeeof the company who has been working in India or outside India, for atleast 1 year. Company Includes Holding and Subsidiary of the company.
Q 3. What are the Conditions for issue of Sweat equity shares ?
Section 54(1) of the Companies Act, 2013 provides that notwithstanding anything Contained in section 53, a company can issue sweat equity shares to existing directors and employees after fulfliing the conditions as follows-
- A) Sweat Equity issued by the company after passing the special resolutionin the general meeting. In general meeting there must be discussion of a) Number of shares, b) Current market Price, C) Consideration, if any and D) Class or classes of directors or employees to whom such equity shares are to be issued.
- B) Where share are listed in a recognised stock exchange, then Company should comply with regulations made in this behalf by SEBI.
- C) In case whose Companies shares are not listed, then company should comply regulations made in this behalf by the Central Government.
Q 4. What’s the Timelimit to issue sweat equity shares after passing the resolution?
Rule 8(3) states company should authorising the issue of Sweat equity shares shall be issue withing a period of not more than 12 months from the date of passing of the special resolution.
Q 5. Is there any limit on issue of Sweat equity shares ?
Sweat equity shares – | Not more than 15% of the existing paid up equity share capital or Issue value ₹ 5 crore; Whiever is Higher. |
Issuance of sweat equity- | Shall not exceed 25% of the paid up equity capital of the company at any time. |
Q 6. Whether sweat equity shares are eligible to transfer or not?
Sweat equity shares are issued to directors and employees shall be locked or non-transferable for a period of 3 years from the date of the allotment.
Q 7. What the rank will be given to sweat Equity shares holder ?
Section 54(2) provides that 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.
Q 8. Whether Independent Director are eligible to participate in sweat equity scheme?
Yes, it’s the interesting fact that, Independent Director is eligible to participate in sweat equity shares, but he is not eligible for ESOP scheme.
Q 9. What is the valuation aspect of Sweat Equity shares?
Rule 8(6) Provides- | 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. |
Rule 8(7) Provides- | The valuation of intellectual property rights or of know how or value additions for which sweat equity shares are to be issued, shall be carried out registered valuer. |
Rule 8(8) Provides- | Copy of gist along with critical elements of the valuation report obtained under rule 8(6) and rule 8(7) shall be sent to the shareholders with the notice of the general meeting. |
For example, if the company is worth $300,000 and it has issued 20,000 shares, then each share is worth $15. In case, if such person has performed the delivered work for sweat equity worth $60,000, then such person should be paid 4,000 stock share.
Q 10. Can you think that sweat equity shares are part of the managerial Remuneration?
Sweat equity shares issued shall be treated as part of managerial Remuneration, if the following conditions are fulfilled namely-
- A) The sweat equity shares are issued to any director or manager and
- B) They are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards.
Q 11. Explain the maintenance of register of sweat equity shares?
Company shall maintain a Register of sweat equity shares in form No (SH.3) and shall forthwith enter therein the particulars of sweat equity shares issued under section 54. The registered 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 company secretary of the company or any other person authorised by the board.
Q 12. What is the process which a company is to follow for allotting Sweat Equity Shares?
There are some steps for alloting sweat equity shares as follows:-
- A) Convene a Board meeting atleast 7 days notice for discussing issue of sweat equity shares and fixing up date, time, venue for calling the EGM.
- B) In case of unlisted Company, Company has issue notice atleast 21 clear days before the date of the meeting or It can be called at shorter notice with the concent of 95% of the shareholders.
– Hold and convene the general meeting by passing special resolution for getting approval of the issue of Sweat equity shares.
– After passing the Resolution, company should be sent intimation in Form MGT-14 with the registrar within 30 days from the date of the passing resolution.
– After the resolution is filled, call the next boad meeting for issue of sweat equity shares
– After passing Board Resolution, company should be sent intimation of board resolution in form PAS 3 with the registrar within 30 days days of the passing Board Resolution.
Q 13. Which Forms are required to be filled for allotment of Sweat Equity Shares?
In form SH 3 company shall maintain all details as regarding of allotment of Sweat Equity shares.
Q 14. What is the Accounting Treatment for issue of Sweat Equity Shares?
If sweat equity shares are allotted during accounting period, then accounting value of sweat equity shares must be recorded in financial statement of a company. Such non-cash consideration shall be treated in the following manner in the books of account of the company-
Case 1: Sweat Equity Shares issued in consideration other than cash
- a) where non cash consideration takes the form of a depreciable of amortizable asset, it shall be carried to the balance sheet of the company in accordance with the accounting standards.
Or
- b) where clause (a) is not applicable, it shall be expensed as provided in the accounting standards.
Case 2: Sweat Equity Shares issued in lieu of Managerial Remuneration
In thus situation, treated as consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company as per the accounting standards.
Case 3: Sweat Equity Shares issued to Director/Employee with no consideration
In thus situation, company wants good result in increased profits to the company for a number of years, and therefore sweat equity shares provide a new form of adequate return, so it will treated as Expenses as per the accounting standard.
Case 4: Sweat Equity Shares issued in lieu of acquisition of Assets
In thus situation, the value of the asset, as determined by the valuation report, shall be carried in the balance sheet as per the accounting standards.
Q 15. Penalties for non compliance of procedure for issue of Sweat Equity Shares?
Penalty must be arises Rs. 5 crore subject to the 25% of the paid up capital of the company.
Q 16. Which Companies can issue Sweat Equity Shares?
- A) Those companies which have permanent set up who are working in India or abroad from last 1 year. ( Includes Subsidiary/ holding)
- B) As per the new rule, Start up companyare also includedin it. Recently the relaxation moves has been occurred for start up companies, In thus situation, government has allowed them to issue sweat equity shares within 10 years of their incorporation. There is maximum limit for start up for issuing sweat equity share is 50% of the paid up capital after incorporation.