Procedure for Issue of SWEAT Equity Shares by Company

Khushboo Sharma

Khushboo Sharma

Published on: Apr 17, 2024

Pragya Sonkhiya

Updated on: Apr 17, 2024

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Introduction:

SWEAT Equity Shares represent a unique avenue for companies to reward their employees for their hard work and dedication. This innovative approach allows employees to acquire ownership in the company through their contributions of time, effort and expertise, rather than solely through monetary investment. Section 2(88) of the Companies Act, 2013 explains SWEAT Equity Shares as the equity shares issued by a company to its Directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. Such SWEAT equity shares can be issued for cash or as non-cash consideration.

The following Persons (directors or employees) shall be eligible for SWEAT Equity Shares:

1. An individual who is a permanent employee of the company and has been working in or outside India for at least a year, or
2. A director of the company, regardless of being a whole-time director or not, or
3. An employee or a director of the Company’s holding or subsidiary company in or outside India.

A listed company whose equity shares are listed on a recognized stock exchange shall issue SWEAT equity shares to its employees in accordance with section 54 of the Companies Act, 2013 and SEBI (Share Based Employee Benefits and SWEAT Equity) Regulations, 2021. However, a company which is not a listed company, is not required to comply with the Securities and Exchange Board of India Regulations on SWEAT Equity and abstain to issue SWEAT equity shares, unless a special resolution authorizing such issue is passed by the company in general meeting.

Note: The amount of SWEAT equity shares issued shall be treated as part of managerial remuneration if the following conditions are fulfilled:

1. the SWEAT equity shares are issued to any director or manager and
2. 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.

Applicable Provisions:

1. Section 39, 54, 96, 100, 173 of Companies Act, 2013
2. Rule 8 of Companies (Share Capital and Debentures) Rules, 2014
3. Regulation 31, 32, 34, 36, 37, 41 of SEBI (Share Based Employee Benefits and SWEAT Equity) Regulations, 2021
4. Regulation 30, 46(3) of SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015
5. Rule 12 of Companies (Prospectus and Allotment of Securities) Rules, 2014
6. Provisions of Secretarial Standards-1 (SS-1)

Mandatory Requirements:

1. Obtain approval from its Shareholders/Members by passing a Special resolution in a duly convened general meeting.
2. Undertaking the valuation of the know-how or intellectual property rights or value addition by a merchant banker.
3. Placing a certificate from the secretarial auditor to the effect that the issue of SWEAT equity shares is in accordance with provisions of the applicable laws and resolution passed for the same.
4. SWEAT equity shares issued to directors or employees shall be locked in or will be non-transferable for a period of six months from the date of trading approval.
5. The Company shall abstain from issuing SWEAT Equity Shares more than:
   • 15% of the existing Paid-up Equity Share Capital in a year and
   • 25% of the Paid-up Equity Share Capital of the Company anytime.
6. Maintenance of a Register of SWEAT Equity Shares in Form SH 3.
Note: The special resolution passed by the company authorizing the issue of SWEAT equity shares shall be valid for making the allotment within a period of not more than twelve months from the date of such resolution.

Procedure:

1. Obtain Valuation Report for Determining the Fair Price for SWEAT Equity Shares:
   • The company shall undertake the valuation of intellectual property rights or of know how or value additions for which SWEAT equity shares are to be issued, by a merchant banker.
   • The merchant banker shall obtain such certificate from an independent Chartered A ccountant certifying that the valuation of the know-how or intellectual property rights or value addition is in accordance with the relevant accounting standards.
   • A copy of valuation report so obtained shall be sent to the shareholders together with the notice of the general meeting.
2. Convene a Meeting of Board of Directors:
   The company shall convene a Meeting of its Board of Directors to pass a Board resolution for the following:
   • approving the proposal of issue of SWEAT Equity shares, the quantum and ratio of such issue, allotment of such SWEAT equity shares, and record date for such issue
   • authorizing the Company Secretary or such other concerned official, as the case may be, for issuing the notice of general meeting, circulating the minutes of the Board Meeting where the proposal of SWEAT equity shares issue was approved and do such other acts so as to give effect to the decision of the Board
   Refer to the Procedure for Conducting Board Meeting for the detailed procedure.
   Note:
   • In the absence of any provision in respect of issuance of SWEAT Equity shares in the Articles of Association (AoA), the Company shall make amendments in its AoA and requisite Board resolution shall also be passed to this effect. Refer to the Procedure for Alteration of Articles of Association for the detailed procedure.
   • In case, the issue of SWEAT Equity shares is not within the limit of total authorized share capital of the company, then necessary steps shall be taken to increase the authorized share capital and requisite Board resolution shall also be passed for amending the Memorandum of Association (MoA). Refer to the Procedure for Increasing Authorized Share Capital of Company for the detailed procedure.
   • Board of Directors shall place in the Annual General Meeting held subsequent to the issue of SWEAT equity shares a certificate from the secretarial auditor of the company that the issue of SWEAT equity shares has been made in accordance with these regulations and with the resolution passed by the company authorizing the issue of such SWEAT equity shares.
3. Disclosing the Outcome of the Board Meeting to the Stock Exchange(s) by Listed Entity:
   The listed entity shall disclose to the Stock Exchange(s) (where its shares are listed) about the outcome of Board meeting held to consider the issuance of SWEAT equity shares within the timelines specified therein and also, update about the same on its website within 2 working days.
4. Convene Extra Ordinary General Meeting:
   The company shall convene a General Meeting of its Members to pass a Special resolution for approving the proposal of issue of SWEAT Equity shares.
   Refer to the Procedure for Conducting General Meeting for a detailed procedure.
5. Filing Form MGT-14 with ROC:
   The company shall file a copy of Board Resolution and Resolution with majority passed in duly convened Board meeting and General meeting in Form MGT-14 within 30 days of passing such resolution along with the requisite documents and fees, with the Registrar of Companies (ROC).
6. Send a Statement Pertaining to Issue of SWEAT Equity Shares to the Recognized Stock Exchange by Listed Entity:
   The Issuing company shall within seven days of the issue of SWEAT equity shares send a statement to the recognized stock exchange, disclosing the following details:
   • number of SWEAT equity shares issued
   • price at which the SWEAT equity shares are issued
   • total amount received towards SWEAT equity shares
   • details of the persons to whom SWEAT equity shares have been issued and
   • ensuing modifications in the capital structure and shareholding pattern, before and after the issuance of SWEAT equity shares.
7. Filing Form PAS-3 with the Registrar:
   The company shall file Form PAS-3 within thirty days of passing of the resolution for allotment of shares with following attachments:
   • Copy of special resolution passed in the general meeting of the company
   • Copy of Board Resolution for Allotment of Shares
   • List of Allottees stating their names, addresses, occupation and number securities allotted to each of allottees
   • Valuation Report of Registered Valuer
   • PAS-5 (Record of allottees) within fifteen days from the allotment date
   • Any other mandatory attachment if necessary.
8. Issuance of Share Certificates:
   
   • The company shall issue the share certificate containing a statement for lock in period in Form SH-1 within 2 months from the date of allotment of shares.
   • Every share certificate of the Issue shall be attracting stamp duty as per the provisions of the Indian Stamp Duty Act of the respective state where the issuer is located.
9. Maintenance of Register of Shares:
   
   • The company shall make an entry of allotment of the SWEAT equity shares in the register maintained in Form SH-3 for such purposes. Such register shall be kept at its registered office 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.