(1) A company other than a listed company, which is not required to comply with the Securities and Exchange Board of India Regulations on sweat equity, shall not issue sweat equity shares to its directors or employees at a discount or for consideration other than cash, for their providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called, unless the issue is authorised by a special resolution passed by the company in general meeting.
Explanation.—For the purposes of this rule—
(i) the expressions "Employee" means—
(a) a permanent employee of the company who has been working in India or outside India, for at least last one year; or
(b) a director of the company, whether a whole time director or not; or
(c) an employee or a director as defined in sub-clause (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company;
(ii) the expression 'Value additions' means actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing knowhow or making available rights in the nature of intellectual property rights, by such person to whom sweat equity is being issued for which the consideration is not paid or included in the normal remuneration payable under the contract of employment, in the case of an employee.
(2) The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall contain the following particulars, namely:—
(a) the date of the Board meeting at which the proposal for issue of sweat equity shares was approved;
(b) the reasons or justification for the issue;
(c) the class of shares under which sweat equity shares are intended to be issued;
(d) the total number of shares to be issued as sweat equity;
(e) the class or classes of directors or employees to whom such equity shares are to be issued;
(f) the principal terms and conditions on which sweat equity shares are to be issued, including basis of valuation;
(g) the time period of association of such person with the company;
(h) the names of the directors or employees to whom the sweat equity shares will be issued and their relationship with the promoter or/and Key Managerial Personnel;
(i) the price at which the sweat equity shares are proposed to be issued;
(j) the consideration including consideration other than cash, if any to be received for the sweat equity;
(k) the ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity and how it is proposed to be dealt with;
(l) a statement to the effect that the company shall conform to the applicable accounting standards; and
(m) diluted earning per share pursuant to the issue of sweat equity shares, calculated in accordance with the applicable accounting standards.
(3) The special resolution authorising the issue of sweat equity shares shall be valid for making the allotment within a period of not more than twelve months from the date of passing of the special resolution.
(4) The company shall not issue sweat equity shares for more than fifteen per cent of the existing paid up equity share capital in a year or shares of the issue value of rupees five crores, whichever is higher:
Provided that the issuance of sweat equity shares in the Company shall not exceed twenty five per cent, of the paid up equity capital of the Company at any time:
1 [Provided further that a startup company, as defined in notification number GSR 180(E) dated 17th February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of lndia, may issue sweat equity shares not exceeding fifty per cent of its paid 'javascript:void(0);'
up capital up to five years from the date of its incorporation or registration.]
(5) The sweat equity shares issued to directors or employees shall be locked in/non-transferable for a period of three years from the date of allotment and the fact that the share certificates are under lock-in and the period of expiry of lock-in shall be stamped in bold or mentioned in any other prominent manner on the share certificate.
(6) The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as the fair price giving justification for such valuation.
(7) The valuation of intellectual property rights or of know how or value additions for which sweat equity shares are to be issued, shall be carried out by a registered valuer, who shall provide a proper report addressed to the Board of directors with justification for such valuation.
(8) A copy of gist along with critical elements of the valuation report obtained under clause (6) and clause
(7) shall be sent to the shareholders with the notice of the general meeting.
(9) Where sweat equity shares are issued for a non-cash consideration on the basis of a valuation report in respect thereof obtained from the registered valuer, 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 accounting standards; or
(b) where clause (a) is not applicable, it shall be expensed as provided in the accounting standards.
(10) The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purposes of sections 197 and 198 of the Act, if the following conditions are fulfilled, namely:—
(a) the sweat equity shares are issued to any director or manager; and
(b) they are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards.
(11) In respect of sweat equity shares issued during an accounting period, the accounting value of sweat equity shares shall be treated as a form of compensation to the employee or the director in the financial statements of the company, if the sweat equity shares are not issued pursuant to acquisition of an asset.
(12) If the shares are issued pursuant to acquisition of an asset, the value of the asset, as determined by the valuation report, shall be carried in the balance sheet as per the Accounting Standards and such amount of the accounting value of the sweat equity shares that is in excess of the value of the asset acquired, as per the valuation report, shall be treated as a form of compensation to the employee or the director in the financial statements of the company.
Explanation.—For the purposes of this sub-rule, it is hereby clarified that the Accounting value shall be the fair value of the sweat equity shares as determined by a registered valuer under sub-rule (6).
(13) The Board of Directors shall, inter alia, disclose in the Directors' Report for the year in which such shares are issued, the following details of issue of sweat equity shares namely:—
(a) the class of director or employee to whom sweat equity shares were issued;
(b) the class of shares issued as Sweat Equity Shares;
(c) the number of sweat equity shares issued to the directors, key managerial personnel or other employees showing separately the number of such shares issued to them, if any, for consideration other than cash and the individual names of allottees holding one per cent or more of the issued share capital;
(d) the reasons or justification for the issue;
(e) the principal terms and conditions for issue of sweat equity shares, including pricing formula;
(f) the total number of shares arising as a result of issue of sweat equity shares;
(g) the percentage of the sweat equity shares of the total post issued and paid up share capital;
(h) the consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares;
(i) the diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.
(14)(a) The company shall maintain a Register of Sweat Equity Shares in Form No. SH.3 and shall forthwith enter therein the particulars of Sweat Equity Shares issued under section 54.
(b) 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.
(c) 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.
1. Second proviso inserted by the Companies (Share Capital and Debentures) Third Amendment Rules, 2016, w.e.f. 19-7-2016.
9. Issue and redemption of preference shares.
(1) A company having a share capital may, if so authorised by its articles, issue preference shares subject to the following conditions, namely:—
(a) the issue of such shares has been authorized by passing a special resolution in the general meeting of the company.
(b) the company, at the time of such issue of preference shares, has no subsisting default in the redemption of preference shares issued either before or after the commencement of this Act or in payment of dividend due on any preference shares.
(2) A company issuing preference shares shall set out in the resolution, particulars in respect of the following matters relating to such shares, namely:—
(a) the priority with respect to payment of dividend or repayment of capital vis-a-vis equity shares;
(b) the participation in surplus fund;
(c) the participation in surplus assets and profits, on winding-up which may remain after the entire capital has been repaid;
(d) the payment of dividend on cumulative or non-cumulative basis;
(e) the conversion of preference shares into equity shares;
(f) the voting rights;
(g) the redemption of preference shares.
(3) The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall, inter alia, provide the complete material facts concerned with and relevant to the issue of such shares, including—
(a) the size of the issue and number of preference shares to be issued and nominal value of each share;
(b) the nature of such shares i.e. cumulative or non-cumulative, participating or nonparticipating, convertible or non-convertible;
(c) the objectives of the issue;
(d) the manner of issue of shares;
(e) the price at which such shares are proposed to be issued;
(f) the basis on which the price has been arrived at;
(g) the terms of issue, including terms and rate of dividend on each share, etc.;
(h) the terms of redemption, including the tenure of redemption, redemption of shares at premium and if the preference shares are convertible, the terms of conversion;
(i) the manner and modes of redemption;
(j) the current shareholding pattern of the company;
(k) the expected dilution in equity share capital upon conversion of preference shares.
(4) Where a company issues preference shares, the Register of Members maintained under section 88 shall contain the particulars in respect of such preference shareholder(s).
(5) A company intending to list its preference shares on a recognized stock exchange shall issue such shares in accordance with the regulations made by the Securities and Exchange Board of India in this behalf.
(6) A company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act and the preference shares may be redeemed:—
(a) at a fixed time or on the happening of a particular event;
(b) any time at the company's option; or
(c) any time at the shareholder's option.
10. Issue and redemption of preference shares by company in infrastructural projects.
A company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding twenty years but not exceeding thirty years, subject to the redemption of a minimum ten per cent of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders.
11. Instrument of transfer.
(1) An instrument of transfer of securities held in physical form shall be in Form No.SH.4 and every instrument of transfer with the date of its execution specified thereon shall be delivered to the company within sixty days from the date of such execution.
(2) In the case of a company not having share capital, provisions of sub-rule (1) shall apply as if the references therein to securities were references instead to the interest of the member in the company.
(3) A company shall not register a transfer of partly paid shares, unless the company has given a notice in Form No. SH.5 to the transferee and the transferee has given no objection to the transfer within two weeks from the date of receipt of notice.
12. Issue of employee stock options.
A company, other than a listed company, which is not required to comply with Securities and Exchange Board of India Employee Stock Option Scheme Guidelines6 shall not offer shares to its employees under a scheme of employees' stock option (hereinafter referred to as "Employees Stock Option Scheme"), unless it complies with the following requirements, namely:—
(1) The issue of Employees Stock Option Scheme has been approved by the shareholders of the company by passing a special resolution.
Explanation :For the purposes of clause (b) of sub-section (1) of section 62 and this rule "Employee" means—
(a) a permanent employee of the company who has been working in India or outside India;
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or
(b) a director of the company, whether a whole time director or not but excluding an independent director; or
(c) an employee as defined in clause (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company 7[***] but does not include—
(i) an employee who is a promoter or a person belonging to the promoter group; or
(ii) a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten per cent of the outstanding equity shares of the company:
8 [Provided that in case of a startup company, as defined in notification number GSR 180(E), dated 17th February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry Government of India, the conditions mentioned in sub-clauses (i) and (ii) shall not apply up to five years from the date of its incorporation or registration.]
(2) The company shall make the following disclosures in the explanatory statement annexed to the notice for passing of the resolution—
(a) the total number of stock options to be granted;
(b) identification of classes of employees entitled to participate in the Employees Stock Option Scheme;
(c) the appraisal process for determining the eligibility of employees to the Employees Stock Option Scheme;
(d) the requirements of vesting and period of vesting;
(e) the maximum period within which the options shall be vested;
(f) the exercise price or the formula for arriving at the same;
(g) the exercise period and process of exercise;
(h) the Lock-in period, if any;
(i) the maximum number of options to be granted per employee and in aggregate;
(j) the method which the company shall use to value its options;
(k) the conditions under which option vested in employees may lapse e.g. in case of termination of employment for misconduct;
(l) the specified time period within which the employee shall exercise the vested options in the event of a proposed termination of employment or resignation of employee; and
(m) a statement to the effect that the company shall comply with the applicable accounting standards.
(3) The companies granting option to its employees pursuant to Employees Stock Option Scheme will have the freedom to determine the exercise price in conformity with the applicable accounting policies, if any.
(4) The approval of shareholders by way of separate resolution shall be obtained by the company in case of—
(a) grant of option to employees of subsidiary or holding company; or
(b) grant of option to identified employees, during any one year, equal to or exceeding one per cent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option.
(5)(a) The company may by special resolution, vary the terms of Employees Stock Option Scheme not yet exercised by the employees provided such variation is not prejudicial to the interests of the option holders.
(b) The notice for passing special resolution for variation of terms of Employees Stock Option Scheme 'javascript:void(0);'
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shall disclose full of the variation, the rationale therefor, and the details of the employees who are beneficiaries of such variation.
(6)(a) There shall be a minimum period of one year between the grant of options and vesting of option:
Provided that in a case where options are granted by a company under its Employees Stock Option Scheme in lieu of options held by the same person under an Employees Stock Option Scheme in another company, which has merged or amalgamated with the first mentioned company, the period during which the options granted by the merging or amalgamating company were held by him shall be adjusted against the minimum vesting period required under this clause;
(b) The company shall have the freedom to specify the lock-in period for the shares issued pursuant to exercise of option.
(c) The Employees shall not have right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to them, till shares are issued on exercise of option.
(7) The amount, if any, payable by the employees, at the time of grant of option—
(a) may be forfeited by the company if the option is not exercised by the employees within the exercise period; or
(b) the amount may be refunded to the employees if the options are not vested due to nonfulfilment of conditions relating to vesting of option as per the Employees Stock Option Scheme.
(8)(a) The option granted to employees shall not be transferable to any other person.
(b) The option granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.
(c) Subject to clause (d), no person other than the employees to whom the option is granted shall be entitled to exercise the option.
(d) In the event of the death of employee while in employment, all the options granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.
(e) In case the employee suffers a permanent incapacity while in employment, all the options granted to him as on the date of permanent incapacitation, shall vest in him on that day.
(f) In the event of resignation or termination of employment, all options not vested in the employee as on that day shall expire. However, the employee can exercise the options granted to him which are vested within the period specified in this behalf, subject to the terms and conditions under the scheme granting such options as approved by the Board.
(9) The Board of directors, shall, inter alia, disclose in the Directors' Report for the year, the following details of the Employees Stock Option Scheme:
(a) options granted;
(b) options vested;
(c) options exercised;
(d) the total number of shares arising as a result of exercise of option;
(e) options lapsed;
(f) the exercise price;
(g) variation of terms of options;
(h) money realized by exercise of options;
(i) total number of options in force;
(j) employee wise details of options granted to:—
(i) key managerial personnel.
(ii) any other employee who receives a grant of options in any one year of option amounting to five per cent or more of options granted during that year.
(iii) identified employees who were granted option, during any one year, equal to or exceeding one per cent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant.
(10) (a) The company shall maintain a Register of Employee Stock Options in Form No. SH.6 and shall forthwith enter therein the particulars of option granted under clause (b) of sub-section (1) of section 62.
(b) The Register of Employee Stock Options shall be maintained at the registered office of the company or such other place as the Board may decide.
(c) 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.
(11) Where the equity shares of the company are listed on a recognized stock exchange, the Employees Stock Option Scheme shall be issued, in accordance with the regulations made by the Securities and Exchange Board of India in this behalf.
6. Now SEBI (Share Based Employees Benefits) Regulations, 2014.
7. Words "or of an associate company" omitted by the Companies (Share Capital and Debentures) Amendment Rules, 2015, w.e.f. 18-3-2015.
8. Proviso inserted by the Companies (Share Capital and Debentures) Third Amendment Rules, 2016, w.e.f. 19-7-2016.
Issue of shares on preferential basis