Section 54 of Companies Act 2013. Issue of sweat equity shares

Overview: “(1) Notwithstanding anything contained in section 53, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely: —

(a) the issue is authorised by a special resolution passed by the company;

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

(c)  ***

(d) where the equity shares of the company are listed on a  recognised stock exchange , the sweat equity shares are issued in accordance with the regulations made by the  Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.

(2) The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank pari passu with other equity shareholders.”

Understanding the Basics

The section 54 of the companies Act talks about the Issue of Sweat equity shares. Before diving in the depth of the section we should first know what the sweat equity shares mean.

At the time of the formation of the company there are very few people who invest their hard-earned money in the corporation. If they have invested just for the sake of the growth and development of the company and not for any monetary benefit then the company in return of this the company provides equity in the company.

The Essence of Section 54 of Companies Act: Rewarding Talent with Ownership

The sweat equity agreement is created by the initial investors and promoters who want to ensure the company’s progress. It is known as Sweat equity because it denotes the time and efforts of the investors for the organization’s growth without having any consideration in cash. This compels the company to issue a different and special class of shares for those investors with the name of Equity share capitals in order to compensate them for their non- cash contribution for the organization. The company through this contribution will have the following advantages:

1. Technical expertise:

In exchange for their technical expertise, a developer creating the company’s main platform may obtain shares.

2. Market access:

As compensation for their connections and network, a person who introduces the company to important investors may receive shares.

3. Intellectual property:

A scientist contributing a patented invention can receive shares in exchange for its ownership.

Person’s entitled under Section 54 of Companies Act

The sweat equity shares are generally issued to those investors when the company is at the start-up level. Therefore, following persons can be entitled to get sweat equity shares:

1. Employees
2. Directors
3. Promoters

Condition Precedent

Section 54 outlines the prerequisite requirements that must be met before an organization is permitted to issue shares of sweat equity. The conditions are namely: –

• The company needs to pass the issue of shares by special resolution.

• The resolution passed by the board of directors is to specify the number of shares that are going to be issued, their current face value and the investors to whom it is being issued.

• The sweat equity shares will be issued to any investors only when it is in compliance with share capital and debentures rules, 2014 and other legal provisions relating to it.

Conditions and Safeguards

The Companies Act of 2013’s section 54(2) provide protection for the sweat equity shares. In a nutshell, these are as follows: –

• Regulation:

The sweat equity shareholders will have the same rights as equity shareholders. These can be used in the same manner the equity shares are used by the shareholder. It implies that all the rights and obligations that applies on the equity shareholders will also be applicable in sweat equity shareholders.

• Authorization:

The resolution is passed by the board of directors and the shareholders in order to maintain transparency in the process of issuance of sweat equity shares.

• Valuation:

The number of sweat equity shares that will be issued to the investor will depend upon the monetary investment that they have made for the company. Therefore, the correct valuation of the investment should be ensured by the company in order to compensate them for their time and resource.

• Lock-in Period:

Lock-in period refers to that time restriction in which the sweat equity shares are forbid to be re-sale so that long term commitment can be ensured. 

Conclusion

It makes sweat equity more accessible and enables companies to recognize and reward non-cash contributions that foster expansion. Through an extensive understanding of its provisions, intricacies, and recent developments, all stakeholders can appropriately utilize this tool to promote innovation, draw in talent, and contribute to a lively and dynamic corporate environment. Keep in mind that ethical use of sweat equity necessitates openness, reasonable compensation, and compliance with laws, all of which eventually result in advantageous outcomes for corporations, contributors, and investors.

FAQs

1. What is sweat equity share?

 The sweat equity agreement is created by the initial investors and promoters who want to ensure the company’s progress. It is known as Sweat equity because it denotes the time and efforts of the investors for the organisation’s growth without having any consideration in cash. 

2. Who gets sweat equity shares?

The following persons can be entitled to get sweat equity shares: –

1. Employees
2. Directors
3. Promoters

3. What is the limit of sweat equity?

There has been a limit on the issue of sweat equity share. A maximum of 15% or 5 crore rupees whichever is more will be the value of sweat equity share in one year.

4. How is sweat equity issued?

The sweat equity share is issued to those investors who had invested their time and resource for the growth and development of the company. The company in a board meeting of the shareholders and the directors will pass a special resolution that will enable the company to issue sweat equity shares. The issuance of shares must also ensure that these are done while being in compliance with other regulatory bodies and provisions.

5. Does sweat equity have tax?

The sweat equity shares are treated as income therefore they are taxable in India.