SEBI (Issue of Sweat Equity) Regulations, 2002 – Securities Laws and Capital Markets Important Questions

SEBI (Issue of Sweat Equity) Regulations, 2002 – Securities Laws and Capital Markets Important Questions

Question 1.
To whom sweat equity shares may be issued the SEBI (Issue of Sweat Equity) Regulations, 2002?
Answer:
Sweat equity shares may be issued to employees & promoter [Regulation 4]: A company whose equity shares are listed on a recognized stock exchange may issue sweat equity shares in accordance with Section 54 of Companies Act, 2013 and these Regulations to its:
(a) Employees
(b) Directors.

Question 2.
State the provisions relating to the issue of sweat equity shares to promoters under the SEBI (Issue of Sweat Equity) Regulations, 2002.
Answer:
Sweat equity shares can be issued to directors or employees and not to others. Thus, sweat equity shares cannot be issued to promoters unless he is a director or an employee. The director may be whole-time or part-time i.e. executive or non-executive.

Issue of Sweat Equity Shares to Promoters [Regulation 6]:

  • In case of an Issue of sweat equity shares to promoters, the same shall also be approved by a simple majority of the shareholders in the General Meeting. However, for passing such a resolution, voting through postal ballot as specified under Rule 22 of the Companies (Management & Administration) Rules, 2014 can also be adopted. The promoters to whom such sweat equity shares are proposed to be issued shall not participate in such resolution.
  • Each transaction of issue of sweat equity shall be voted by a separate resolution.
  • The resolution for the issue of sweat equity shall be valid for a period of not more than 12 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.

Authors Note: Section 54 of the Companies Act, 2013 provides that sweat equity shares can be issued by passing a special resolution in the general meeting of the company. Whereas Regulation 6 of the SEBI(Issue of Sweat Equity) Regulations, 2002 provides that sweat equity shares can be issued to promoters by passing a resolution of a simple majority of the shareholders in General Meeting; which is doubtful. Even otherwise, special resolution u/s 62 of the Companies Act, 2013 will also be required as a right issue is not being made. Hence, in the opinion of the author issue of sweat equity shares to promoters requires special resolution.

Question 3.
Write a short note on Pricing of Sweat Equity Shares
Answer:
Pricing of Sweat Equity Shares [Regulation 7]:
1. The price of sweat equity shares shall not be less than the higher of the following two:
(a) The average of the weekly high and low of the closing prices of the related equity shares during the last 6 months preceding the relevant date.

(b) The average of the weekly high and low of the closing prices of the related equity shares during the 2 weeks preceding the relevant date. . Explanation: “Relevant date” for this purpose means the date which is 30 days prior to the date on which the meeting of the General Body of the shareholders is convened, in terms of Section 54(1 )(a) of the Companies Act, 2013.

2. If the shares are listed on more than one stock exchange, but quoted only on one stock exchange on a 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 exchange where there is the 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 day shall be considered.

Question 4.
Write a short note on the Accounting treatment of sweat equity shares
Answer:
Accounting Treatment [Regulation 9]: Where the sweat equity shares are issued for a non-cash consideration, such noncash 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.

(b) Where clause (a) is not applicable, it shall be expensed as provided in the relevant accounting standards.
In simple words, consideration against which sweat equity shares are issued is either treated as an asset or will be debited to profit & loss account as expenses.

Question 5.
Under what circumstances the amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purpose of Sections 197 of the Companies Act, 2013?
Answer:
Ceiling on Managerial Remuneration [Regulation 11]: The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purpose of Section 197 of the Companies Act, 2013 if the following conditions are fulfilled:

  • Sweat equity shares are issued to any director or manager.
  • Sweat equity shares are issued for non-cash consideration, which does not take the form of an asset that can be carried to the balance sheet of the company in accordance with the relevant accounting standards.

Question 6.
Write a short note on Lock-in of sweat equity shares
Answer:
Lock-in of sweat equity shares [Regulation 12]: The sweat equity shares shall be locked in for a period of 3 years from the date of allotment.

The SEBI (ICDR) Regulations, 2009 on the 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.

Question 7.
Elucidate the obligations of the Company under the SEBI (Issue of Sweat Equity) Regulations, 2002.
Answer:
Obligations of the Company [Regulation 15]: The Company shall ensure that –
(a) The explanatory statement to the notice for a general meeting shall contain disclosures as are specified u/s 54(1 )(b) and Regulation 5(1).

(b) The Auditor’s certificate as required under Regulation 10 shall be placed in the general meeting of shareholders.

(c) The company shall within 7 days of the issue of sweat equity, issue or send a statement to the exchange, disclosing:

  1. A number of sweat equity shares.
  2. Price at which the sweat equity shares are issued.
  3. Total amount invested in sweat equity shares.
  4. Details of the persons to whom sweat equity shares are issued.
  5. The consequent changes in the capital structure and the shareholding pattern after and before the issues of sweat equity.

Question 8.
Distinguish between: Sweat equity & Issue of capital on the preferential basis [Dec. 2009 (4 Marks)]
Answer:
Following are the main points of distinction between sweat equity & the issue of capital on a preferential basis:

Points Sweat Equity Shares Issue of capital on preferential basis
Meaning Sweat equity shares mean equity shares issued by a company to its employees or directors at a discount or for consideration, other than cash for providing know-how or making available right in the nature of intellectual property rights or value additions, by whatever name called. A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 which is neither a rights issue nor a public issue.
To whom issued Sweat equity shares are issued to employees or directors. A preferential issue is an issue to a select group of persons.
How issued Sweat equity shares are issued at a discount or for consideration, other than cash. A preferential issue is at par or at a premium.

Question 9.
Distinguish between: Sweat Equity Shares & ESOS j [Dec. 2010 (4 Marks), June 2015 (4 Marks)]
Answer:
Following are the main points of distinction between sweat equity shares & ESOS:

Points Sweat Equity Shares ESOS
Meaning Sweat equity shares mean equity shares issued by a company to its directors or employees 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. Employee stock option means the option given to the whole-time directors, officers, or employees of a company, which gives such directors, officers, or employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price.
How regulated Issue of sweat equity shares is regulated by Section 53 of the Companies Act, 2013 and the SEBI (Issue of Sweat Equity) Regulations, 2002 and the Companies (Share Capital & Debentures) Rules, 2014. Issue of shares under employee stock option plan is regulated by Section 2(37) of the Companies Act, 2013 and the SEBI (Share Based Employee Benefits) Regulations, 2014.
Issue Sweat equity shares can be issued at a discounted price or free for know-how and services to the company. Employee stock options can be issued with the conversion right at a pre-determined price. The issue price can be less than the intrinsic value of the shares.
Consideration The consideration can be partly cash and partly IPRs/value addition or fully non-cash consideration. The consideration has to be paid in cash.
Purpose Sweat equity shares are mainly intended to be issued to build up equity for directors or employees with technical capability but with meager financial resources. Employee stock options can be used for multiple purposes – as a talent retention tool, as an incentive, as a remuneration mechanism.

Question 10.
Write a short note on Sweat equity shares [June 2014 (5 Marks)]
Answer:
Sweat Equity Shares [Section 2(88)]: Sweat equity shares mean equity shares issued by a company to its directors or employees 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.

Issue of sweat equity shares [Section 54]: A company can issue sweat equity- shares, of a class of shares already issued, if the following conditions are satisfied:
1. The issue has been authorized by a special resolution passed by the company in the general meeting.

2. Such special resolution should clearly specify:

  • Number of shares
  • Current market price
  • Consideration and
  • Classes of directors or employees to whom such equity shares are to be issued.

3. At least1 a year should have elapsed from the date on which the company was entitled to commence business. [Deleted by the Companies (Amendment) Act, 2017]

4. A company whose shares are listed on a recognized stock exchange is-suing sweat equity shares should comply with the SEBI (Issue of Sweat Equity) Regulations, 2002.

5. A company whose shares are not so listed should comply with the Companies (Share Capital & Debentures) Rules, 2014.

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 and the holders of sweat equity shares shall rank pari passu {on an equal footing) with other equity shareholders. [Section 54 (2)]

Register of Sweat Equity Shares [Rule 8(14) of the Companies (Share Capital & Debentures) Rules, 2014]: The company shall maintain a Register of Sweat Equity Shares in Form No. SH. 3 and shall forthwith enter therein the particulars of issue of sweat equity shares.

The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide.

The entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.

Question 11.
An Indian company is planning to issue sweat equity shares of a class of | shares already issued. Explain the meaning of sweat equity shares and advise the company regarding the conditions to be fulfilled to issue sweat equity? [Dec. 2014 (6 Marks)]
Answer:
Sweat Equity Shares [Section 2(88)]: Sweat equity shares mean equity shares issued by a company to its directors or employees 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.

Issue of sweat equity shares [Section 54]: A company can issue sweat equity- shares, of a class of shares already issued, if the following conditions are satisfied:
1. The issue has been authorized by a special resolution passed by the company in the general meeting.

2. Such special resolution should clearly specify:

  • Number of shares
  • Current market price
  • Consideration and
  • Classes of directors or employees to whom such equity shares are to be issued.

3. At least1 a year should have elapsed from the date on which the company was entitled to commence business. [Deleted by the Companies (Amendment) Act, 2017]

4. A company whose shares are listed on a recognized stock exchange is-suing sweat equity shares should comply with the SEBI (Issue of Sweat Equity) Regulations, 2002.

5. A company whose shares are not so listed should comply with the Companies (Share Capital & Debentures) Rules, 2014.

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 and the holders of sweat equity shares shall rank pari passu {on an equal footing) with other equity shareholders. [Section 54 (2)]

Register of Sweat Equity Shares [Rule 8(14) of the Companies (Share Capital & Debentures) Rules, 2014]: The company shall maintain a Register of Sweat Equity Shares in Form No. SH. 3 and shall forthwith enter therein the particulars of issue of sweat equity shares.

The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide.

The entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.

Question 12.
Z Ltd. has issued Sweat Equity Shares for a non-cash consideration. What are the possible accounting treatments in the books of Z Ltd.? [June 2019(4 Marks)]
Answer:
Accounting Treatment [Regulation 9]: 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.

(b) Where clause (a) is not applicable, it shall be expensed as provided in the relevant accounting standards.
In simple words, consideration against which sweat equity shares are issued is either treated as an asset or will be debited to profit & loss account as expenses.

Question 13.
A listed NBFC has been granted a license to run as a small finance bank by the Reserve Bank of India under a recently announced policy to improve the financial inclusion of the country. During the last three years, the attrition rate for top-level management employees was not too high. As RBI has granted licenses to many small banks, therefore, the promoters of the Bank feel that the attrition rate will be high in the coming period. The Board of directors wishes to allot Sweat Equity shares to employees. You, being compliance officer of the g Bank, advise the Board about the pricing of the Sweat Equity shares. [June 2019 (4 Marks)]
Answer:
Pricing of Sweat Equity Shares [Regulation 7]:
1. The price of sweat equity shares shall not be less than the higher of the following two:
(a) The average of the weekly high and low of the closing prices of the related equity shares during the last 6 months preceding the relevant date.
(b) The average of the weekly high and low of the closing prices of the related equity shares during the 2 weeks preceding the relevant date. . Explanation: “Relevant date” for this purpose means the date which is 30 days prior to the date on which the meeting of the General Body of the shareholders is convened, in terms of Section 54(1 )(a) of the Companies Act, 2013.

2. If the shares are listed on more than one stock exchange, but quoted only on one stock exchange on a 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 exchange where there is the 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 day shall be considered.

Securities Laws and Capital Markets Questions and Answers

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