sweat equity.233docx.docx

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Contents1. INTRODUCTION............................................................................ Error! Bookmark not defined.

2. UNLISTED COMPANIES (ISSUE OF SWEAT EQUITY SHARES) RULES, 2003.......... Error!

Bookmark not defined.

3. ISSUE OF SWEAT EQUITY SHARES......................................................................................... 4

4. ISSUE OF SWEAT EQUITY TO PROMOTERS.......................................................................... 4

5. DIFFERENCE BETWEEN SWEAT EQUITY SHARES AND ESOP.......................................... 5

6. PRICING OF SWEAT EQUITY SHARES.................................................................................... 5

7. VALUATION OF INTELLECTUAL PROPERTY........................................................................ 6

8. ACCOUNTING TREATMENT...................................................................................................... 6

9.

PLACING OF AUDITORS BEFORE ANNUAL GENERAL MEETING.................................... 6

10.CEILING ON MANAGERIAL REMUNERATION...................................................................... 7

11.LOCK-IN OF SWEAT EQUITY SHARES.................................................................................... 7

12.LISTING.......................................................................................................................................... 7

13.POST ISSUE COMPLIANCES...................................................................................................... 7

14.NON-CASH CONSIDERATION................................................................................................... 7

15.APPLICABILITY OF TAKEOVER............................................................................................... 8

16.GENERAL OBLIGATIONS........................................................................................................... 8

17.OBLIGATIONS OF THE COMPANY........................................................................................... 8

18.ACTION AGAINST INTERMEDIARIES..................................................................................... 8

19.PENALTIES AND PROCEDURE................................................................................................. 9

20.POWER OF THE BOARD TO ORDER INSPECTION OR INVESTIGATION.......................... 9

21.DUTY TO PRODUCE RECORDS ETC........................................................................................ 9

22.POWER OF THE BOARD TO ISSUE DIRECTIONS .................................................................. 9

23.Bibliography.................................................................................................................................. 10

BIJITH KUMAR

665 VTH

SEMESTER


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INTRODUCTION

The sweat equity shares has been explained in the section 79 A of The Companies Act 1956.This provision allows the issue of sweat equity shares. According to Companies Act, sweat

equity are equity shares that a company issues to an individual in consideration of his /herservices, knowhow or any other value addition that the company has benefited from, in otherwords it is the equity given to a company s executives to reflect the value the executives

have added and will continue to add to the company but initially this section was not presentwhen in the companies Act 1956, it was brought about by the amendment of The CompaniesAct in 1999.

Sweat equity shares literally means the shares issued by the company to employees ordirectors at a discount or for consideration other than cash fir providing know-how or makingavailable rights in the nature of intellectual property rights or value additions, the whatevername called.

For the last couple of years the terms sweat equity has been in the news. In the recentlyconcluded Indian Premier League 3, this term acquired immense news coverage this was dueto The Kochi franchise controversy triggered by Lalit. The particular controversy all startedwhen a consortium led by Rendezvous Sports was set up to bid for an IPL team andapproached the Minister of State for external Affairs for guidance. They were then told tochoose Kerala. In an official statement of the Minister of State for External Affairs, ShashiTharoor said Rendezvous includes a number ofpeople, including many I have never met,and Sunanda Pushkar, whom I know well.

In the case Shashi Tharoor was said to have misused his power for the benefit of his friendSunatha Pushkar. Shashi tharoor was one of the mentors of the Kochin Tuskers team. The

facts which have come up are that Rendezvous Consortium got the Kochi franchise aftermaking a bid of whopping $333 million or Rs 1533 crores at the time of bidding. . It gave25% stake to Rendezvous Sports World free of cost. Rendevous consortium is not aincorporated body. Sunatha Pushkar gets 18% stake of this 25 % with just 1% liability in caseof loses.

The owners of the Kochi Consortium came out saying that Pushkars share as sweat equity

is in lieu of a salary for her Marketing experience. But this could not be called sweat equityas it has a limit of only 15% not 18% as Pushkar got. The most important aspect of sweatequity shares is that it cannot be surrendered. An unlisted company can issue sweat equityonly after the there has been an independent valuation of the benefits, which the concerned

person to whom the sweat equity is given, brings to the organization.

For instance, if a person works for creating patents for a company, then the company canissue equity to him, instead of paying cash. The Sweat equity shares could be issued for manyother things too such as the person providing technical know-how, brand rights or similarvalue additions to the company. A company whose equity shares are listed on a recognizedstock exchange may issue sweat equity shares in accordance with Section 79A of CompaniesAct, 1956 and these Regulations to its- Employees, Directors etc.


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UNLISTED COMPANIES (ISSUE OF SWEAT EQUITY SHARES) RULES, 2003

The guidelines referred to in S. 79A are the Rules issued by the Central Government, whichneed 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.

Rule 9 of the Rules provides that where a company proposes to issue sweat equity shares forconsideration other than cash, it shall comply with the following:

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

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

(c) The valuer shall submit a valuation report to the company giving justification for thevaluation;

(d) A copy of the valuation report of the valuer must be sent to the shareholders with thenotice of the general meeting;

(e) the company shall give justification for issue of sweat equity shares for considerationother 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 managerialremuneration for the purposes of S. 198, S. 309, S. 310, S. 311 and S. 387 of the Act, if the

following conditions are fulfilled:(i) the sweat equity shares are issued to any director or manager;

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

Rule 8 of the Rules prescribes that the issue of sweat equity shares to employees and directorsshall be at a fair price calculated by an independent valuer.

Rule 2(v) of the Rules defines the expression value addition. The said Rule reads as under:

"(v) value addition means anticipated economic benefits derived by the enterprise from an

expert and/or professional for providing the know-how or making avail-able rights in thenature of intellectual property rights, by such person to whom sweat equity is issued forwhich the consideration is not paid or included in :

(a) The normal remuneration payable under the con-tract of employment, in the case of anemployee, and/or

(b) Monetary consideration payable under any other contract, in the case of non-employee"

The term know-how is not restricted to technical know-how but can extend to practical

knowledge, skill and expertise. Hence, imparting practical knowledge to the company wouldbe considered as value addition.


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ISSUE OF SWEAT EQUITY SHARES

A company may issue sweat equity shares of a class of shares already issued if the followingconditions are fulfilled:-

(a)The issue of Sweat equity shares is authorised by a special resolution passed by thecompany in the general meeting.

(b)The resolution specifies the number of shares, current market price, consideration, ifany, and the class o classes of directors or employees to whom such quity shares areto be issued.

(c)Not less than one year, at the date of issue, has elapsed since the date on which thecompany was entitled to commence business.

(d)The sweat equity shares of a company, whose equity shares are listed on a recognisedstock exchange, are issued in accordance with the regulations made by the Securitiesand Exchange Board of India (SEBI) in this behalf.

Provided that in the case of a company whose equity shares are not enlisted on anyrecognised stock exchange, the sweat equity shares are issued in accordance with theguidelines may be prescribed.

Explanation 1- For the purpose of this sub section, the expression a company means thecompany incorporated, formed and registered under this Act and includes its subsidiary

company incorporated in country outside India.

Explanation 2- for the purposes of this Act, the expression sweat equity shares meansequity shares issued by the company to the employees or directors at discount or forconsideration other than cash for providing know-how or making available rights in thenature of intellectual property rights or available additions by whatever name called.

ISSUE OF SWEAT EQUITY TO PROMOTERS

The Regulations prescribe different procedures for the issue of the sweat equity in case ofpromoters may be because the promoters with their relatives, associates hold majority ofshares.

If the issue is in favor of the promoters then an ordinary resolution of the shareholders in theAGM/EGM is sufficient. In order to pass the resolution, voting by postal ballot is requiredwhich is governed by the (Passing of the resolution by Postal Ballot) Rules, 2001 (the Postal

Rules).

The postal ballot includes voting by postal or electronic mode instead of voting

personally. The notice for postal ballot can be by: a registered post acknowledgement due; or


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certificate of posting and with an advertisement stating that the ballot papers aredispatched,

Published in a leading English newspaper and in one vernacular newspaper circulatedin the state in which the registered office of the company is situated.

The procedure for the passing of resolution by postal ballot for the issue of sweat

equity involves the following: The company should make a note below the notice of general meeting of the

shareholders for the understanding of the members that the transaction requires theconsent of the shareholders through postal ballot.

The board of directors should appoint a scrutinizer who, in the opinion of the board,could conduct the postal ballot process in a fair and transparent manner.

The scrutinizer is required to submit its report after the last date of the receipt of thepostal ballot.

The scrutinizer should be willing to be appointed and should be available at theregistered office of the company for the purpose of ascertaining the requisite majority.

The scrutinizer is duty-bound to maintain a register to record the consent of theshareholders.

The postal ballot and all other papers should be under its safe custody till thechairman of company considers, approves and signs the minutes of the meeting.Thereafter, the scrutinizer shall return the ballot papers and other related registers tothe company so as to preserve such papers till the resolution is given effect.

If the shareholders do not vote within 30 days of the issue of notice, the law considersthat transaction of issue of Sweat Equity shall be voted by a separate resolution.

The resolution for issue of Sweat Equity shall be valid for a period of not more thantwelve months from the date of passing of the resolution.

For the purposes of passing the resolution, the explanatory statement shall contain the

disclosures as specified in the Schedule.

DIFFERENCE BETWEEN SWEAT EQUITY SHARES AND ESOP

(a) Sweat Equity is grant of shares at discount or without monetary considerations whereasEmployee Stock Option Plan (ESOP) / Employee Stock Option Scheme Scheme (ESOS) isgrant of option to purchase share at predetermined price given to employees.

(b) Sweat Equity can be issued to the promoters of the Company whereas ESOS/ESOP

cannot be issued to the promoters or promoter group.(c) Minimum lock in period of 3 years for Sweat Equity whereas no such lock in period forESOP and lock in period of 1 year for Employee stock purchase scheme (ESPS).

PRICING OF SWEAT EQUITY SHARES

The price of sweat equity shares shall not be less than the higher of the following:

(a) The price of the sweat equity shares shall not be less than average of the weekly high andlow of the closing prices of the related equity shares during last six months preceding the

relevant date.


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(b) The price of the sweat equity shares shall not be less than the average of the weekly highand low of the closing prices of the related equity shares during the two weeks preceding therelevant date.

Explanation: Relevant date for this purpose means the date which is thirty days priorto

the date on which the meeting of the General Body of the shareholders is convened, in termsof clause (a) of sub section (1) of section 79A of the Companies Act.

(2) If the shares are listed on more than one stock exchange, but quoted only on one stockexchange on given date, then the price on the stock exchange shall be considered.

(3) If the share price is quoted on more than one stock exchange, then the stock exchangewhere there is highest trading volume during that date shall be considered.

(4) If the shares are not quoted on the given date, then the share price on the next trading dayshall be considered.

VALUATION OF INTELLECTUAL PROPERTY

(1) The valuation of the intellectual property rights or of the know how provided or othervalue addition mentioned in Explanation II of sub section (1) of Section 79A of theCompanies Act, 1956 shall be carried out by a merchant banker.

(2) The merchant banker may consult such experts and valuers, as he may deem fit havingregard to the nature of the industry and the nature of the property or other value addition.

(3) The merchant banker shall obtain a certificate from an independent Chartered Accountantthat the valuation of the intellectual property or other value addition is in accordance with therelevant accounting standards.

ACCOUNTING TREATMENT

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

(a) Where the non cash consideration takes the form of a depreciable or amortizable asset, itshall be carried to the balance sheet of the company in accordance with the relevantaccounting standards; or(b) Where clause (a) is not applicable, it shall be expensed as provided in the relevantaccounting standards.

PLACING OF AUDITORS BEFORE ANNUAL GENERAL MEETING

In the General meeting subsequent to the issue of sweat equity, the Board of Directors shallplace before the shareholders, a certificate from the auditors of the company that the issue of

sweat equity shares has been made in accordance with the Regulations and in accordancewith the resolution passed by the company authorizing the issue of such Sweat Equity Shares.


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CEILING ON MANAGERIAL REMUNERATION

The amount of Sweat Equity shares issued shall be treated as part of managerialremuneration for the purpose of sections 198, 309, 310, 311 and 387 of the CompaniesAct, 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 assetwhich can be carried to the balance sheet of the company in accordance with the relevantaccounting standards.

LOCK-IN OF SWEAT EQUITY SHARES

The Sweat Equity shares shall be locked in for a period of three years from the date ofallotment.(2) The Securities and Exchange Board of India (Disclosures and InvestorProtection) Guidelines, 2000 on public issue in terms of lock-in and computation of

promoters contribution shall apply if a company makes a publicissue after it has issued afterit has issued sweat equity.

LISTING

The Sweat Equity issued by a listed company shall be eligible for listing only if suchissuesare in accordance with these regulations.

POST ISSUE COMPLIANCES

After the allotment of the sweat equity shares, the Board of Directors are obliged to place inthe annual general meeting the auditors certificate stating that the issue of the sweat equity

has been made in accordance with the Regulations and the shareholders resolution. The

company is required to send a statement to the stock exchange disclosing the following: the number and price of issued sweat equity shares; the total amount invested in sweat equity; details of the person to whom the sweat equity is issued; the consequent change in the capital structure and the shareholding pattern after and

before the issue of the sweat equity.

NON-CASH CONSIDERATION

The condition precedent to issue sweat equity for non-cash consideration is that an employeemust provide know-how or make available intellectual property rights.


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In case of allotment for non-cash consideration, the important issue which arises is thevaluation of the consideration. The Regulations prescribe that the value of the intellectual

property rights or of know-how is to be carried out by the merchant banker who must consultexperts and valuers who the merchant banker consider fit for the purpose. The merchant

banker is under an obligation to provide a certificate from an independent chartered

accountant confirming that the valuation is in accordance with the relevant accountingstandards. After the valuation is complete, attention must be paid to the accounting treatmentof the non-cash consideration. If the non-cash consideration takes the form of a depreciableasset it is carried to the balance sheet of the company. However, if it does not take the formof depreciable asset then it must be expensed as provided by the relevant accountingstandards. If non-cash consideration takes the form of an asset, which cannot be transferred tothe balance sheet then it is treated as managerial remuneration. However, for this purpose theissue of sweat equity must be made in favor of the director or manager.

APPLICABILITY OF TAKEOVER

Any acquisition of Sweat Equity Shares shall be subject to the provision of Securities andExchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations,1997.

GENERAL OBLIGATIONS

OBLIGATIONS OF THE COMPANY

The company shall ensure that -(a) The explanatory statement to the notice for general meeting shall contain disclosures asare specified under clause (b) of sub section (1) of Section 79A and sub regulation (1) ofRegulation 5.

(b) The Auditors certificate as required under Regulation 10 shall be placed in the generalmeeting of shareholders.

(c) The company shall within seven days of the issue of sweat equity, issue or send statementto the exchange, disclosing:(i) Number of sweat equity shares;

(ii) Price at which the sweat equity shares are issued;(iii) Total amount invested in sweat equity shares;(iv)Details of the persons to whom sweat equity shares are issued; and(v) The consequent changes in the capital structure and the shareholding pattern after and

before the issues of sweat equity.

ACTION AGAINST INTERMEDIARIES

The Board may, on failure of the merchant banker to comply with the obligations underthese regulations or failing to observe due diligence in respect of valuation of intellectual

property or value addition, initiate action against merchant banker in terms of Securities andExchange Board of India (Merchant Bankers) Regulations, 1992.


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PENALTIES AND PROCEDURE

POWER OF THE BOARD TO ORDER INSPECTION OR INVESTIGATION

The Board may,suo-motu or upon information received by it, cause an inspection to be madeof the books of account or other books and papers of any company or an investigation to bemade in respect of the conduct and affairs of any person associated with the process of sweatequity, by appointing an officer of the Board 1[not below the rank of Assistant GeneralManager for the purpose of conducting inspection and not below the rank of Division Chieffor the purpose of conducting an investigation]:

DUTY TO PRODUCE RECORDS ETC

It shall be the duty of every person in respect of whom an inspection or investigation hasbeen ordered to produce before the inspecting or the investigating officer such book, accountsand other documents in his custody or control and furnish him with such statements andSubmission of Report to the Board.The Inspecting or Investigating Officer shall, on completion of the inspection or Investigationafter taking into account all relevant facts and circumstances, submit a report to the Board.

POWER OF THE BOARD TO ISSUE DIRECTIONS

The Board may in the interests of the securities market and without prejudice to its rights toinitiate action, including criminal prosecution under Section 24 of the Act or Section 621 ofCompanies Act give such directions as it deems fit including:-

(a) directing the person concerned not to further deal in securities in any particular manner;

(b) directing the person concerned to sell or divest the sweat equity shares acquired inviolation of the provisions of these Regulations or any other law or regulations;

(c) Prohibiting the persons concerned, from accessing the securities market;

(d) Directing the disgorgement of any ill-gotten gains or profits or avoidance of loss;

(e) Restraining the company from making a further offer for sweat equity.


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Bibliography

Company law- R.K.bangia

Company law- Paranjapee

www.wikipedia.com

Securities and exchange board of india (issue of sweat equity) regulatons, 2002

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