Primary Market - Public Issues - Sweat Equity Shares
Securities and Exchange Board of India ( Issue of Sweat Equity ) Regulations, 2002.

Section 79A of Companies Act 1956 defines Sweat Equity Shares as under

expression "sweat equity shares" means 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 value additions, by whatever name called.

The conditions for issue of such shares by a company are specified in the section of companies act as under:

1. the issue of sweat equity shares is authorised by a special resolution passed by the company in the general meeting;

2. the resolution specifies the number of shares, current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;

3. not less than one year has, at the date of the issue elapsed since the date on which the company was entitled to commence business;

4. the sweat equity shares of a company whose equity shares are listed on a recognised stock exchange are issued in accordance with the regulations made by the Securities and Exchange Board of India in this behalf;

Provided that in the case of a company whose equity shares are not listed on any recognised stock exchange, the sweat equity shares are issued in accordance with the guidelines as may be prescribed.

All the limitations, restrictions and, provisions relating to equity shares shall be applicable to such sweat equity shares

Applicability of the Regulation to Unlisted Company

The regulations are not applicable to an unlisted company. Provided the unlisted company coming out with initial public offering and seeking listing of its securities on the stock exchange, pursuant to issue of sweat equity shares, shall comply with the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000.

A company whose equity shares are listed on a recognised stock exchange may issue sweat equity shares in accordance with Section 79A of Companies Act, 1956 and these Regulations to its-

1. Employees

2. Directors

Special Resolution (Regulation 5)

1. (1)For the purposes of passing a special resolution under clause (a) of sub-section (1) of section 79A of the Companies Act, 1956 the explanatory statement to be annexed to the notice for the general meeting pursuant to section 173 of the Companies Act, 1956 shall contain the following disclosures

   1. a. The total number of shares to be issued as sweat equity.

   2. b. The current market price of the shares of the company.

   3. c. The value of the intellectual property rights or technical know how or other value addition to be received from the employee or director along with the valuation report / basis of valuation.

   4. d. The names of the employees or directors or promoters to whom the sweat equity shares shall be issued and their relationship with the company.

   5. e. The consideration to be paid for the sweat equity.

   6. f. The price at which the sweat equity shares shall be issued.

   7. g. Ceiling on managerial remuneration, if any, which will be affected by issuance of such sweat equity.

   8. h. A statement to the effect that the company shall conform to the accounting policies as specified by the Board.

   9. Diluted Earning Per Share pursuant to the issue of securities to be calculated in accordance with International Accounting Standards / standards specified by the Institute of Chartered Accountants of India.

2. (2) The issue of sweat equity shares to promoters shall be subject to the additional requirements specified in SEBI Regulations (Regulation 6)

   1. The issue of sweat equity shares to promoters, should be approved by simple majority of the shareholders in General Meeting.

      Provided that for passing such resolution, voting through postal ballot as specified under Companies (Passing of the resolution by Postal Ballot) Rules 2001 shall also be adopted.

      Provided further that the promoters to whom such Sweat Equity Shares are proposed to be issued shall not participate in such resolution.

   2. Each transaction of issue of Sweat Equity shall be voted by a separate resolution.

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

   4. For the purposes of passing the resolution, the explanatory statement shall contain the disclosures as specified in the Schedule (Listed under Regulation 5.1 above)

Pricing of Sweat Equity Shares (Regulation 7)

1. The price of sweat equity shares shall not be Shares. less than the higher of the following :-

   1. The average of the weekly high and low of the closing prices of the related equity shares during last six months preceding the relevant date; or

   2. The average of the weekly high and low of the closing prices of the related equity shares during the two weeks preceding the relevant date.

Explanation :-"relevant date" for this purpose means the date which is thirty days prior to the date on which the meeting of the General Body of the shareholders is convened, in terms of clause (a) of sub-section (1) of section 79A of the Companies Act.

1. If the shares are listed on more than one stock exchange, but quoted only on one stock exchange on the given date, then the price on that stock exchange shall be considered.

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

3. 3. If shares are not quoted on the given date, then the share price on the next trading day shall be considered.

Valuation of intellectual Property. (Regulation 8.1)

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

1. 1. The merchant banker may consult such experts and valuers, as he may deem fit having regard to the nature of the industry and the nature of the property or other value addition

2. 2. The merchant banker shall obtain a certificate from an independent Chartered Accountant that the valuation of the intellectual property or other value addition is in accordance with the relevant accounting standards.

Accounting Treatment (Regulation 9.1)

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 :-

1. 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

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

Placing of Auditors Certificate Before Annual General Meeting.(Regulation 10)

In the general meeting subsequent to the issue of sweat equity, the Board of Directors shall place 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 accordance with the resolution passed by the company authorizing the issue of such Sweat Equity Shares.

Ceiling on Managerial Remuneration.(Regulation 11)

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 :

1. i. the Sweat Equity shares are issued to any director or manager; and,

2. 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.

Lock-in of sweat equity shares. (Regulation 12.1)

The Sweat Equity shares shall be locked in for a period of three years from the date of allotment. The Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000, on public issue in terms of lock-in and computation of promoters' contribution shall apply if a company makes a public issue after it has issued sweat equity.

Listing(Regulation 13)

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

Applicability of Takeover(Regulation 14)

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

General Obligations - Obligations of the Company (Regulation 15)

The company shall ensure that -

1. a. The Explanatory Statement to the notice for general meeting shall contain certain disclosures as are specified under clause (b) of Sub-section (1) of Section 79A of the Companies Act, 1956 and sub-regulation (1) of Regulation 5.

2. b. Auditor's certificate as required under Regulation 10 shall be placed in the general meeting of shareholders.

3. c. The company shall within seven days of the issue of sweat equity, issue or send statement to the recognized stock exchange, disclosing :

   1. (i) number of sweat equity shares ;

   2. (ii) price at which the sweat equity shares are issued ;

   3. (iii) total amount invested in sweat equity shares ;

   4. (iv) details of the persons to whom sweat equity shares are issued; and,

   5. (v) the consequent changes in the capital structure and the shareholding pattern after and before the issue of sweat equity.

Action against intermediaries(Regulation 16)

The Board may, on failure of the merchant banker to comply with the obligations under these regulations or failing to observe due diligence in respect of valuation of intellectual property or value addition, initiate action against the merchant banker in terms of Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992.

Power of the Board to order inspection or investigation.
Regulation 17

Power of the Board to issue directions
Regulation 20