A company or any organization is composed of different structures that accommodate a workforce of different profiles. Employees, directors, managers, executive officers, etc. all play their roles and get remunerated for their work. The company also pays its hard working employees generously by adding bonuses, incentives, etc., apart from the salary. However, there are certain employees who go beyond the limit to accomplish some desired goal that benefits the company a lot. This can come as winning some big project, getting work completed before the deadline, or generating huge profits. Such employees need special applause for their hard work. Sweat equity shares serve as the rewards that a company offers to such employees or directors for their exceptional contributions to the organization’s growth.
What are Sweat Equity Shares?
Sweat Equity Shares are the rewards given by a company to its employees or directors for their extraordinary contributions in some specific field. The sweat equity shares are explained under Section 2(88) of the Companies Act, 2013 as equity shares that a company issues to its employees or directors. They are offered at a discount or for any consideration, other than cash. Further, the shares are issued to the employees/directors for their contribution in adding value.
Sweat Equity Shares are more than just incentives to reward hard-working employees
As clear from the definition itself, sweat equity shares cannot be issued to all employees/directors. Besides, there are certain conditions on the issuance of these shares that come in the form of legal formalities. Let us learn more about these legalities involved in detail.
Issuing Sweat Equity Shares: Legal Formalities Involved
Who Can Issue Sweat Equity Shares?
The following entities can issue sweat equity shares:
- Sole Proprietorship
- Private Company
- Public Company
- Listed/unlisted Company
- Section 8 Company
Who Can Be Issued Sweat Equity Shares?
As per Section 2(88) of the Companies Act, 2013, sweat equity shares can be issues by a company to its:
- Employees
- Directors
The definition of an ‘Employee’ under Explanation (i) to the Rule 8(1) of the Companies Rules, 2014 is:
- A company’s permanent employee working in or outside the country for alteast last one year, or
- A whole-time or part-time director
- An employee or director of the company, in or outside the country, or of a subsidiary entity of the parent company.
Procedure to Issue Sweat Equity Shares
A company can issue sweat equity shares to its employees/directors by following the below-mentioned procedure:
- The company needs to convene a board meeting to discuss the request/proposal of issuing sweat equity shares and to pass a special resolution in this regard after deciding a date, time, place, and purpose for a general meeting.
- The company should issue notices to its shareholders in writing for the general meeting. There should also be an explanatory statement along with the notice. The explanatory statement must contain the following details and should be annexed to the notice:
- Date at which the board meeting was held and the board approved the proposal for the issuance of sweat equity shares.
- Explanation, or reasons for the issue of sweat equity shares.
- Under which class of shares the to be issued sweat equity are going to be classified.
- The total number of sweat equity shares offered.
- The directors/employees to which the sweat equity shares are to be issued.
- Main terms of the issuance and basis of valuation.
- Association of the person (to whom the shares will be issued) with the company.
- The proposed price of the sweat equity shares.
- Consideration, including the ones other than cash to be mentioned.
- Highest managerial remuneration, if any, be turned void by the issuance of sweat equity shares.
- A statement confirming that the company will adhere to the accounting standards applicable to the issuance of shares.
- The general meeting shall be convened and a special resolution shall be passed.
- The company shall file the passed resolution in Form No. MGT-14 MCA within 30 days of passing the resolution.
- A board meeting shall be called for the allotment of the proposed sweat equity shares.
- Form No. PAS-3 shall be filed within 30 days from the date of the board resolution for allotting sweat equity shares.
- A Register of Sweat Equity Shares shall be maintained in Form No. SH-3 to enter the particulars of issued sweat equity shares.
- The company shall maintain the Register of Sweat Equity Shares at its registered office or any place approved by the board.
- The company’s Company Secretary or any other person as appointed by the board shall authenticate the entries in the register.
Forms Associated with the Allotment of Sweat Equity Shares
As mentioned above, there are only two forms required for the allotment of sweat equity shares by the company. The first form is MGT-14 which should be filled and submitted within 30 days from the date of passing the special resolution and the other one is form PAS-3 that should be filed within 30 days from the date of allotment of the sweat equity shares in the board meeting.
Both the forms should be filed within the deadline
Size of Sweat Equity Share That Can be Issued
Sweat equity shares can be issued up to:
- 15% of the existing paid-up capital of the company
- Rs 5 Crores (As per 25% of total paid-up capital of the company)
- For Startups: Not more than 50% of the paid-up capital for up to 5 years from the date of incorporation of the company
Penalty of Non-Compliance with the Laid Provisions
There is no direct or definite penalty for the company that fails to comply with laid provisions for the issue of sweat equity shared. In such a case, the general punishment laid under the relevant sections of the Companies Act, 2013 is taken into consideration. As per the Act, the company or any of its directors or officers who is found guilty of default or failure to follow the legal provisions of issuing sweat equity shares shall be liable to submit a fine of up to Rs 10,000. Additionally, in the case of continuing contravention, the fine shall be extended to Rs 1,000 for every day till the contravention continues.
The issue of sweat equity shares benefits both employees/directors and the company. The employees get duly rewarded for their hard work, while the company can retain hard-working employees and raise capital at the same time. To do this, there are certain procedures that the company should follow in order to avoid any legal hindrance afterward and complete the allocation of shares as smoothly as possible.