All About Sweat Equity and the Legalities to be Followed for Sweat Equity Issuance.

Introduction   It is a well-known fact that the combination of ownership and participative work force is a powerful competitive tool that works mostly in favour of the organizations. It can also be said with certainty that when ownership and participative employment are combined, substantial gains result. The possible way to achieve this is by granting of ESOPs and Sweat Equity.   ESOPs, “Employees Stock Ownership Plans” or "Employees Stock Options Plans" is the generic term for a set of instruments and incentive schemes provided to the employees of a company to motivate, reward, remunerate and to retain them. These are rather modern way of motivating employees as against the age-old method of compensating the employees with salaries alone. It is now an accepted practice for large entities to remunerate their employees, apart from salary, by the way of granting options to the employees to acquire the shares, hence a portion of the ownership, of the company for which they work. This is believed to motivate employees as they can closely relate their success with the success of the entity for which they work.   The employee stock option scheme (ESOS) concept was developed in the 1950s by lawyer and investment banker Louis Kelso, who argued that the capitalist system would be stronger if all workers, not just a few stockholders, could share in owning capital-producing assets. In today’s world, the human capital is unarguably one of the most important resources to run any enterprise. Companies use untraditional methods of remunerating employees to retain their employees and attract new employees to their organization. Therefore, scheme like ESOS, ESPS and sweat equity has gained popularity in recent times.   Sweat Equity   Sweat Equity Shares mean those shares which are issued by the company to its directors and/or employees at a discount or for consideration other than cash for providing know how or making available the rights in the nature of intellectual property rights or value additions. In other words, it refers to equity shares given to the company's employees on favourable terms, in recognition of their work. The issue of sweat equity allows the company to retain the employees by rewarding them for their services. Sweat equity rewards the beneficiaries by giving them incentives in lieu of their contribution towards the development of the company. Further, it enables greater employee stake and interest in the growth of an organization as it encourages the employees to contribute more towards the company in which they feel they have a stake. There are certain significant differences between ESOP and Sweat Equity, which are mentioned below;  

• Sweat Equity is grant of shares at discount or without monetary considerations whereas ESOP/ESOS is grant of option to purchase share at predetermined price given to employees,

 

• Sweat Equity can be issued to the promoters of the Company whereas ESOS/ESOP cannot be issued to the promoters or promoter group, and

 

• Minimum lock in period of 3 years for Sweat Equity whereas no such lock in period for ESOP and lock in period of 1 year for ESPS.
  1. Legal framework for Sweat Equity and Applicable Laws

The government of India has time to time to enacted and published rules and laws governing the sweat equity schemes, issuance and regulations at large. The current opinion is based on the following provisions of law which are in vogue currently;   A1. Companies Act, 2013 Earlier the issue of sweat equity shares for a private company used to be regulated by Section 79A of Companies Act, 1956. Now the same is regulated by Section 54 and Chapter 4 under Companies Act, 2013.   As per the provision, “Sweat equity shares” means such equity shares, which are issued by a Company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.     Sec 54. Issue of Sweat Equity Shares   (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) not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business; and] (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 paripassu with other equity shareholders.      Comment: The COMPANY has to follow and comply with all the current provisions and regulation. To make it easier for COMPANY, the all the compliances are put in tabular format. This will make it easier for the reader to understand and comply with the regulations related to issuance of sweat equity.   Compliance table A  

Sl No.	Compliance to Rules & Regulations	COMPANY Compliance (Yes/No/NA)	Remarks
1	Special resolution passed by the Company (COMPANY)	No	To be passed
2	The resolution mentions number of shares, current market price, consideration, class of directors or employees.	No	To be passed
3	One year has passed since commencement of business	No
4	Compliance with SEBI	Not Applicable to COMPANY	Not listed with Stock exchange

A2. Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003 Sec 4. Special resolution  (1)   For the purpose of passing a special resolution under clause (a) of sub-section (1) of section 79A of the Companies Act, 1956 (1 of 1956), the explanatory statement to be annexed to the notice for the general meeting pursuant to section 173 of the said Act shall contain particulars as specified below. (i)    the date of the meeting at which the proposal for issue of sweat equity shares was approved by the Board of Directors of the company; (ii)   the reasons/justification for the issue; (iii) the number of shares, consideration for such shares and the class or classes of persons to whom such equity shares are to be issued; (iv) the value of the sweat equity shares along with valuation report/ basis of valuation and the price at the which the sweat equity shares will be issued; (v)  the names of persons to whom the equity will be issued and the person's relationship with the company; (vi)  ceiling on managerial remuneration, if any, which will be affected by issuance of such equity; (vii)  a statement to the effect that the company shall conform to the accounting policies specified by the Central Government; and  (viii)   diluted earning per share pursuant to the issue of securities to be calculated in accordance with the Accounting Standards specified by the Institute of Chartered Accountants of India.   (2)   Approval of shareholders by way of separate resolution in the general meeting shall be obtained by the company in case of grant of shares to identified employees and promoters, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversion) of the company at the time of grant of the sweat equity shares.   Sec 5. Register of shares The company shall maintain a Register of Sweat Equity Shares issued under section 79A in the Form specified in Schedule annexed to these rules.   Sec 6. Restriction on issue of sweat equity shares The company shall not issue sweat equity shares for more than 15% of total paid up equity share capital in a year or shares of the value of 5 crores of rupees, whichever is higher except with the prior approval of the Central Government.   Sec 7. Disclosure in the Directors' Report The Board of Directors, shall, inter alia, disclose either in the Directors' Report or in the annexure to the Director's Report, the following details of issue of sweat equity shares: - (a   Number of shares to be issued to the employees or the directors; (b)  conditions for issue of sweat equity shares; (c)  the pricing formula; (d)  the total number of shares arising as a result of issue of sweat equity shares; (e)  money realised or benefit accrued to the company from the issue of sweat equity shares; (f)  diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.     Sec 8.  Pricing of Sweat Equity Shares. - The price of sweat equity shares to be issued to employees and directors shall be at a fair price calculated by an independent valuer.   Sec 9.   Issue of Sweat Equity Shares for consideration other than cash. - Where a company proposes to issue sweat equity shares for consideration other than cash, it shall comply with following: (a)   The valuation of the intellectual property or of the know-how provided or other value addition to consideration at       which sweat equity capital is issued, shall be carried out by a valuer; (b)   the valuer shall consult such experts, as he may deem fit, having regard to the nature of the industry and the nature of the property or the value addition; (c)   the valuer shall submit a valuation report to the company giving justification for the valuation; (d)   a copy of the valuation report of the valuer shall be sent to the shareholders with the notice of the general meeting; (e)    the company shall give justification for issue of sweat equity shares for consideration other than cash, which shall form part of the notice sent for the general meeting; and (f)     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: (i)   the Sweat Equity shares are issued to any director or manager; and, (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.   Sec 10.  Lock-in of sweat equity shares. - Sweat equity shares issued to employees or directors shall be locked in for a period of three years from the date of allotment.   Sec 12.  Accounting policies. - (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: (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 (b)      where clause (a) is not applicable, it shall be expensed as provided in the relevant accounting standards. (2)   In respect of sweat equity shares issued during accounting period, the accounting value of sweat equity shares shall be treated as another form of compensation to the employee or the director in the financial statement of the company.    Comment: As per our understanding of the laws and current situation prevalent with COMPANY there are no problems with any of the regulations under the above laws. The querist has to ensure that while issuing the sweat equity all the following regulations (Table B) and procedures under the Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003, are followed and complied with.     Compliance Table B

Sl No.	Compliance to Rules & Regulations	COMPANY Compliance (Yes/No)	Remarks
1	Special Resolution containing the following;
	a. Date of meeting on sweat equity issue was approved by the Board of Directors	No	To be Complied
	b. The reason and justification for sweat equity issue	No	To be Complied
	c. Number of shares, consideration, and class of person	No	To be Complied
	d. Value of the equity with valuation report and the price	No	To be Complied
	e. Name of the person and relationship with Company	No	To be Complied
	f. Ceiling on managerial remuneration, if any, which will be affected by issuance	No	To be Complied
	g. Statement that COMPANY will conform to the accounting principles	No	To be Complied
	h. Diluted earnings per share pursuant to issuance	No	To be Complied
2	Approval of Shareholder by separate resolution in case the grant of shares equal or exceeds 1% of the issued capital of COMPANY at the time of grant.	No/NA	NA as it may not be applicable
3	Maintain a register as per Sec 79A	No	To be Complied
4	COMPANY will not issue more than 15% of total paid up equity or in a year or shares of the value of Rupees 5 crore whichever is higher.	No	To be Complied
5	Following disclosers in the Director’s report	No	To be Complied
	a. Number of shares to be issued	No	To be Complied
	b. Condition for issue of equity	No	To be Complied
	c. The pricing formula	No	To be Complied
	d. Total number of shares arising as a result of issue of sweat equity	No	To be Complied
	e. Money realized or benefit accrued to COMPANY from the issue of sweat equity	No	To be Complied
	f. Diluted Earnings Per Share pursuant to issuance of sweat equity	No	To be Complied
6	Pricing of sweat equity should be fair price calculated by independent valuer	No	To be Complied
7	Following to follow if consideration is other than cash;
	a. Valuation of intellectual property or of the know-how	No	To be Complied
	b. Valuer needs to submit the justification of the value	No	To be Complied
	c. A copy of valuation repost to be sent to the shareholders with notice for general meeting	No	To be Complied
	d. Justification for issue of sweat equity for consideration other than cash has to be sent with the notice for general meeting.	No	To be Complied
	e. The amount of sweat equity issued will form part of the managerial remuneration (under the provisions of Companies Act, 2013) if; i. Sweat equity shares are issue to Directors or Managers, and , ii. They are issued for non-cash consideration which does not form part of an asset shown in balance sheet.	No	To be Complied
8	Sweat equity shares will be locked in for a period of three years from the date of allotment	No	To be Complied
9	Following to be complied for Accounting Policies;
	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	No/NA	To be confirmed
	b. Is above is not applicable then it will be expenses as per the accounting standards	No/NA	To be confirmed
	c. Accounting value of the sweat equity will be treated as another form of compensation to the employee or the director.	No	To be Complied

      A3. Companies (Share Capital and Debentures) Rules, 2014.   Sec 8. Issue of sweat equity shares. - (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-clauses (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 know-how 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 percent 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 percent, of the paid-up equity capital of the Company at any time.   (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 percent 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.    Comment: Companies (Share Capital and Debentures) Rules, 2014 reiterates the provisions of the Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003. This is to reemphasize the legal provisions of related to issuance of sweat equity. Most of the regulations are repeated to bring in the scrutinizing effect of the law while a company is proposing to issue sweat equity. Section 8 of the Companies (Share Capital and Debentures) Rules, 2014 elaborates on certain additional points which are produced in he below compliance table C. There are certain additional provisions in the Companies(Share Capital and Debentures) Rules, 2014, which are highlighted and underlined in the above sections. COMPANY has to ensure that they comply with all the provisions as mentioned in the below table C.   Compliance Table C

Sl No.	Compliance to Rules & Regulations	COMPANY Compliance (Yes/No)	Remarks
1	The notice for general meeting should contain the principal terms and conditions on which sweat equity shares are to be issued, including basis of valuation	No	To be Complied
2	The notice for general meeting should contain the time period of association of such person with the company	No	To be Complied
3	The issuance of sweat equity shares in the Company shall not exceed twenty five percent, of the paid-up equity capital of the Company at any time	No	To be Complied
4	The company shall maintain a Register of Sweat Equity Shares in Form No. SH.3	No	To be done post issuance
5	The entries in the register shall be authenticated by the Company Secretary of the company	No	To be done post issuance

   

1. Tax Implications for sweat equity allotment.

B1. Income Tax Act, 1961 Sec 17(2)(vi) of Income-tax Act, 1961 For the purposes of sections 15 and 16 and of this section, — (2)"perquisite" 11a includes— [(vi)the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost   or at concessional rate to the assessee. Explanation. —For the purposes of this sub-clause, — (a)"specified   security"   means   the   securities   as   defined   in   clause (h) of section 25 of the Securities Contracts (Regulation) Act, 1956   42   of 1956) and, where employees' stock option has been granted under any plan or scheme therefor, includes the securities offered under such plan or scheme; (b) "sweat equity shares" means 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   rights   in   the   nature   of intellectual property rights or value additions, by whatever name called; (c) the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case   may   be, on   the   date   on   which   the   option   is   exercised   by   the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares; (d)"fair market value” means the value determined in accordance with the method as may be prescribed; (e) "option” means a right but not an obligation granted to an employee to apply   for   the   specified   security   or   sweat   equity   shares   at   a predetermined price;    Comment: If above conditions are satisfied, perquisite will be taxable in the hands of employees in the assessment year relevant to previous year in which shares or securities are allotted or transferred to the employee. The valuation for Securities needs to be done on Fair Market Value of securities at the date of exercise of option by the employee. B2. Valuation of specified securities or sweat equity shares QUOTED SHARES; If the shares of the company are listed on any Stock Exchange, then the Fair Market Value will be average of opening price and closing price of the share on that date. If shares of the company are listed on more than one Stock Exchanges, then the Fair Market Value will be average of Opening Price and Closing Price of shares on that Stock Exchange on which records highest volume of trading of shares of the Company. Where at the date of exercise of option, there is no trading of shares on any Stock Exchange, then the Fair Market Value will be the closing price of the shares on any Stock Exchange on a date closest to the date of exercise of option and immediately preceding such date. UNQUOTED SHARES; if the shares of Company is not listed on any Stock Exchange then the Fair Market Value of Shares will be as determined by the Merchant Bankers on the Specified Date.   “Specified Date”; means the date of exercise of the option, or any date earlier the date of exercise of the option, not being a date, which is more than 180 days earlier than the date of exercise of the option. Sweat Equity shares as per the Income Tax Act, 1961 has 2 aspects. -Salaries. -Capital Gains. Salaries: Whenever an employee receives a sweat equity shares, the value of such shares will be taxable as a perquisite under the head Salaries as per section 17 of Income Tax Act, 1961. The value of taxable perquisite in case of shares allotted to the employee is equal to the fair market value (FMV) of the shares as on the date of which the option is exercised as reduced by the amount actually paid or recovered from each employee. It may be noted that FMV as on the date of exercise of the option is relevant. FMV shall be the average of opening price and closing price of the share on the recognized stock exchange which records the higher volume of trading in the share. Capital Gains: Whenever the Sweat Equity Shares are transferred it is subject to Capital Gains Tax. In this regard, the aspects to be noted are “Period of Holding” & “Cost of Acquisition”. Period of Holding: It shall be reckoned from the date of allotment or transfer of such equity shares. Cost of Acquisition: It shall be the FMV value as computed for the determining the perquisite as mentioned above (Salaries). Points to be noted: If such shares are transferred within a period of 12 months from the date of allotment, then such gains will be treated as Short term Capital Gains If such shares are transferred after holding for a period of 12 months then such gains will be treated as Long term Capital Gains (LTCG).(However the Equity Shares are listed and chargeable to securities transaction tax, it is exempt from LTCG.)     B3. Stamp Duty Applicable As per Section 3 of Indian Stamps Act 1899, Every Share Certificate must bear the necessary stamp duty as per the Stamp Act of the respective State/ Union Territory from which Certificate is issued. The rates of stamp duty can be obtained with reference to relevant article of given State Act. For this transaction where the sweat equities are getting allotted and subsequently transferred, The West Bengal Stamp Rules, 1994 will be applicable and relevant stamp duty will have to be paid as per this rule.     The rate for application of stamp duty is as follow;

Sl No.	No. and Name of Article	Rate of Stamp Duty
1	23 Conveyance 23A Conveyance, in respect of amalgamation, merger, reconstruction, or demerger, of companies, other than amalgamation, merger, reconstruction or demerger, of two banking companies or a banking company with a non-banking financial company, executed on the basis of decree or final order of any Civil Court or every order made by the Tribunal under section 394 of the Companies Act, 1956, as defined by section 2(10), not being a transfer charged or exempted under No. 62, on the market value of the property which is the subject¬ matter of the conveyance, when the property of the transferor company located in the State of West Bengal is transferred to the transferee company by way of such amalgamation, merger, reconstruction, or demerger or companies under the decree of final order of any Civil Court or every order of the Tribunal under section 394 of the Companies Act, 1956: Provided that on and after the constitution of the National Company Law Tribunal, the expression ’High Court’ shall be read as ’Tribunal’.	5% on market value in Panchayet Area 6% on market value in Municipal Areas, Corporation Areas and notified area other than those included in 23(a) and specified mouzas or blocks of South 24 Parganas and North 24 Parganas which are distributed over three action areas of New Town Kolkata Development Authority and divided into a number of blocks. 1% Additional Stamp Duty in both urban and rural areas, if the market value exceeds 40 lakh w.e.f. 02.03.2015. The same duty as a Conveyance (No. 23) on the aggregate of the market value of the shares issued or allotted, in exchange or otherwise, and the amount of consideration paid- (a) by the transferee company, for such amalgamation or merger: Provided that the amount of such duty chargeable under this article shall not exceed: (i) an amount equal to two per centum of the true market value of the immovable property located within the State of West Bengal of the transferor company, or (ii) an amount equal to half per centum of the aggregate of the market value of the shares issued or allotted, in exchange or otherwise, and the amount of consideration paid by such transferor company, for such amalgamation, whichever is higher;

 Comment: Applicable stamp duty will be 7% of the total allotted share value and is to be paid by the transferee meaning, the employee/director to whom the shares are allotted.      

1. Legal Procedure for issue of sweat equity

The allotment and issue of sweat equity when done under the purview of the applicable laws and regulations must be followed by the procedure as laid down in different statutes. All the procedures are to be followed in word and spirit. Following (Table D) are the list of procedures that COMPANY must follow in order to ensure that issuance of Sweat Equities is as per the applicable rules, laws and regulations prevalent in the country.  The Issuing company can take the help of a Company Secretary to get all the following compliances complied with. Compliance Table D

Sl No.	Compliance to Rules & Regulations	COMPANY Compliance (Yes/No)	Remarks
1	Check the eligibility for issue of sweat equity shares based on the conditions stipulated above and obtain valuation report from a registered valuer.	No	To be Complied
2	Issue notice in accordance with the provisions of section 173(3) of the Companies Act, 2013 (not less than 7 days in writing) for convening a meeting of the Board of Directors.	No	To be Complied
3	Hold and convene Board Meeting for the following purpose:
	a. To decide the terms of issue.	No	To be Complied
	b. To fix date, time and venue for holding Extra-Ordinary General Meeting (EGM) to pass special resolution for approval of issue of sweat equity shares.	No	To be Complied
	c. To approve notice of EGM.	No	To be Complied
	d. To authorize any Director or Secretary to issue notice of EGM.	No	To be Complied
4	The explanatory statement should contain the following mandatory details.
	a. the date of the Board meeting at which the proposal for issue of sweat equity shares was approved;	No	To be Complied
	b. the reasons/justification for the issue;	No	To be Complied
	c. the class of shares under which sweat equity shares are intended to be issued;	No	To be Complied
	d. the total number of shares to be issued as sweat equity;	No	To be Complied
	f. the class or classes of directors or employees to whom such equity shares are to be issued;	No	To be Complied
	g. Principal terms and conditions on which sweat equity shares are to be issued, including basis of valuation;	No	To be Complied
	h. Time period of association of such person with the company;	No	To be Complied
	i. 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;	No	To be Complied
	j. the price at which the sweat equity shares are proposed to be issued;	No	To be Complied
	k. the consideration including consideration other than cash, if any to be received for the sweat equity;	No	To be Complied
	l. would the ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity and how is it proposed to be dealt with;	No	To be Complied
	m. a statement to the effect that the company shall conform to the applicable accounting standards; and	No	To be Complied
	n. diluted Earnings Per Share pursuant to the issue of sweat equity securities, calculated in accordance with the applicable accounting standards.	No	To be Complied
5	Issue notice of not less than twenty-one (21) clear days for convening General Meeting to every member of the company, Directors and auditor.	No	To be Complied
6	In case of listed company, send three copies of the notice to the STOCK EXCHANGES on which the securities of the company are listed.	No	To be Complied
7	Hold General Meeting and pass the special resolution	No	To be Complied
8	E-form Filing: File Form MGT-14 with Registrar of Companies within 30 days of the General Meeting with the following attachment:	No	To be Complied
	a. Notice calling the EGM.	No	To be Complied
	b. Certified true Copy of the Special resolution approving issue of Sweat Equity Shares.	No	To be Complied
9	In case of listed company, send copy of the proceedings of the general meeting to the stock exchange with which the company is listed.	No	To be Complied
10	Issue notice in accordance with the provisions of section 173(3) of the Companies Act, 2013, (not less than 7 days in writing) for convening a meeting of the Board of Directors.	No	To be Complied
11	Hold and convene Board Meeting within 12 months and make allotment of sweat equity shares.	No	To be Complied
12	E-form Filing: File return of allotment in Form PAS-3 within 30 days of Board Meeting with the following attachment:
	a. List of allottees, separate list for each allotment	No	To be Complied
	b. Copy of Board resolution approving allotment of shares	No	To be Complied
	c. Valuation Report from the registered valuer is mandatory in case obtained from valuer.	No	To be Complied
13	Pay Stamp duty on Issue Shares as per the relevant State Stamp Act.	No	To be Complied
14	Issue Share Certificates to the allottees.	No	To be Complied
15	Make entry in Register of Sweat Equity Shares maintained in Form No. SH.3	No	To be Complied
16	Make following disclosure in Boards’ Report of the year in which sweat equity issue is made:
	a. Class of director/ employee to whom sweat equity shares were issued;	No	To be Complied
	b. Class of shares issued as Sweat Equity Shares;	No	To be Complied
	c. Number of sweat equity shares issued to the directors, their relatives, 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 1% or more of the issued share capital ;	No	To be Complied
	d. The reasons/justification for the issue;	No	To be Complied
	e. Principal terms and conditions for issue of sweat equity shares, including pricing formula;	No	To be Complied
	f. The total number of shares arising as a result of issue of sweat equity shares;	No	To be Complied
	g. Percentage of the sweat equity shares of the total post issued and paid up share capital;	No	To be Complied
	h. Consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares;	No	To be Complied
	i. Diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.	No	To be Complied