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Sweat equity shares

ACMA Nidhi Jagota (Ass. Manger) (91 Points)

30 September 2012

Can i issue the sweat equity shares if I am running the proprietory firm, if yes then please let me know the procedure & clauses .

Regards,

Nidhi Jagota.

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5 Replies

CS_pp Murali (lawyer) (29 Points)
Replied 30 September 2012

hi Nidhi,

Sweat Equity shares can be issued by Companies ONLY .Both listed or listed also can issue sweat Equity shares if prescribed condition are fullfilled under

Companies (Issue of Sweat Equity Shares) Rules, 2003

regards

Murali

9449331334

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CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 01 October 2012

What is Sweat Equity Share?

The expression â€œsweat equity sharesâ€ 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.

Issue

Issue of sweat equity shares is governed by the provisions of S. 79A of the Companies Act. As per Explanation II to the said Section â€˜sweat equity sharesâ€™ means equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing the know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

For the issuance of the Sweat Equity Shares, this section prescribes some conditions to be fulfilled which are as follows:

Such issue is authorized by a special resolution of the company in the general meeting;
Such resolution specifies the number of shares, current market price, consideration, if any, and the class or classes of the directors or employees to whom such shares are to be issued;
Such issue is after expiry of one year from the date on which the company was entitled to commence business; and
In the case of an unlisted company, such shares are issued in accordance with the prescribed guidelines.

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.

The guidelines referred to in S. 79A are the Rules issued by the Central Government, which need to be followed by unlisted companies. The Rules inter alia provide the procedure to be followed by a company issuing sweat equity shares for consideration other than cash. These Rules shall be applicable to issue of sweat equity shares by all unlisted companies. The following are the highlights of the rules:

1 For the purpose of passing a special resolution under clause (a) of sub-section (1) of section 79A of the Companies Act, 1956 (1 of 1956), the explanatory statement to be annexed to the notice for the general meeting pursuant to section 173 of the said Act shall contain particulars as specified below.

(i) the date of the meeting at which the proposal for issue of sweat equity shares was approved by the Board of Directors of the company;

(ii) the reasons/justification for the issue;

(iii) the number of shares, consideration for such shares and the class or classes of persons to whom such equity shares are to be issued;

(iv) the value of the sweat equity shares alongwith valuation report/ basis of valuation and the price at the which the sweat equity shares will be issued;

(v) the names of persons to whom the equity will be issued and the person's relationship with the company;

(vi) ceiling on managerial remuneration, if any, which will be affected by issuance of such equity;

(vii) a statement to the effect that the company shall conform to the accounting policies specified by the Central Government; and

(viii) diluted earning per share pursuant to the issue of securities to be calculated in accordance with the Accounting Standards specified by the Institute of Chartered Accountants of India.

2 Approval of shareholders by way of separate resolution in the general meeting shall be obtained by the company in case of grant of shares to identified employees and promoters, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversion) of the company at the time of grant of the sweat equity shares.

3. The company shall maintain a Register of Sweat Equity Shares issued under section 79A in the Form specified in Schedule annexed to these rules.

4. The company shall not issue sweat equity shares for more than 15% of total paid up equity share capital in a year or shares of the value of 5 crores of rupees, whichever is higher except with the prior approval of the Central Government.

5. The Board of Directors, shall, inter alia, disclose either in the Directors' Report or in the annexure to the Director's Report, the following details of issue of sweat equity shares:-

(a) Number of shares to be issued to the employees or the directors;

(b) conditions for issue of sweat equity shares;

(d) the total number of shares arising as a result of issue of sweat equity shares;

(e) money realised or benefit accrued to the company from the issue of sweat equity shares;

(f) diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.

6 The price of sweat equity shares to be issued to employees and directors shall be at a fair price calculated by an independent valuer.

7. Where a company proposes to issue sweat equity shares for consideration other than cash, it shall comply with following:

(a) The valuation of the intellectual property or of the know-how provided or other value addition to consideration at which sweat equity capital is issued, shall be carried out by a valuer;

(b) the valuer shall consult such experts, as he may deem fit, having regard to the nature of the industry and the nature of the property or the value addition;

(d) a copy of the valuation report of the valuer shall be sent to the shareholders with the notice of the general meeting;

(e) the company shall give justification for issue of sweat equity shares for consideration other than cash, which shall form part of the notice sent for the general meeting; and

(f) the amount of Sweat Equity shares issued shall be treated as part of managerial remuneration for the purposes of sections 198, 309, 310, 311 and 387 of the Companies Act, 1956 if the following conditions are fulfilled:

(i) the Sweat Equity shares are issued to any director or manager; and,

(ii) they are issued for non-cash consideration, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the relevant accounting standards.

8. Sweat equity shares issued to employees or directors shall be locked in for a period of three years from the date of allotment.

9. In the case of every company that has allotted shares under these Rules, the Board of Directors shall at each annual general meeting place before the shareholders a certificate from the auditors of the company/ practising company secretary that sweat equity shares have been allotted in accordance with the resolution of the company in the general meeting and these Rules.

10. Where the sweat equity shares are issued for a non-cash consideration, such non-cash consideration shall be treated in the following manner in the books of account of the company:

(a) where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the relevant accounting standards;or

(b) where clause (a) is not applicable, it shall be expensed as provided in the relevant accounting standards.

(2) In respect of sweat equity shares issued during accounting period, the accounting value of sweat equity shares shall be treated as another form of compensation to the employee or the director in the financial statement of the company.

Smriti Dhawan (Company Secretary ) (347 Points)
Replied 01 October 2012

A proprietory firm, cannot issue Shares. No question arises with regard to issue of Sweat Equity Shares, if it cannot Shares.

Shares can only be issued by Company

As defined under Section 2(46) of Companies Act, 1956 "share" means share in the share capital of a company, and includes stock except where a distinction between stock and shares is expressed or implied.

Aakash (Audit Assistant) (41 Points)
Replied 01 October 2012

yup, its true that a proprietary firm can't issue share, whether its sweat equity shares or as the case may be.
now i would like to say only a company can issue shares (any type)..

Thanzk and Regard
Aakash Thakral
+91 9717295029

Tanveer Md Masood (Indispensable) (361 Points)
Replied 03 October 2012

DEAR EXPERTS, SWEAT EQUITY SHARES ARE THOSE SHARES WHICH ARE ISSUED BY THE COMPANY TO DIRECTORS OR OTHER EMPLOYEES OF THE COMPANY FOR CONSIDERATION OTHER THAN CASHI IN THE NATURE OF INTELLECTUAL PROPERTY RIGHT OR KNOW HOW . SEC.79 A OF THE COMPANIES ACT PROVIDES FOR SUCH ISSUE OF SHARES.

REGARDS...

TANVEER MD MASOOD

CALCUTTA..

8296849552