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DCA panel for curbs on Sweat Equity quantum

Richa Mishra
K.R. Srivats

NEW DELHI, June 14

UNLISTED companies may have to seek prior approval of the Union Government if they are to issue `Sweat Equity' shares for more than 15 per cent of total paid-up equity share capital in a year or shares of the value of Rs 5 crore, whichever is higher.

A Committee appointed by the Department of Company Affairs (DCA) has favoured such a restriction even as the Committee's Chairman, Prof J.R. Varma, has disagreed with the recommendation.

Prof. Varma is of the view that there are no justifications for placing restrictions on the quantum of stock option grants or Sweat Equity shares that can be issued by a company.

The Committee has, however, held that the primary rationale for such restriction is a concern about possible abuses and misuses in this area. "As such, the intention is that the Central Government would take a sympathetic view of requests for approval of larger option grants or sweat equity issues in genuine cases.

The majority is also of the view that the restrictions themselves should be reviewed after a period of two to three years on the basis of the experience gained during this period," the committee said.

It has also recommended that sweat equity issued to directors for consideration other than cash would be subject to the ceiling on managerial remuneration under Section 198 of the Companies Act.

Further, the draft rules on Sweat Equity stipulate that approval of shareholders by way of separate resolution in the general meeting should be obtained by the company in case of grant of shares to identified employees and promoters, during any one year, equal to or exceeding one per cent of the issued capital (excluding outstanding warrants and conversion) at the time of grant of the sweat equity shares.

A company issuing sweat equity shares will also need to maintain a register of sweat equity shares.

The Board of Directors of the company are also required to disclose in the Directors Report the number of sweat equity shares to be issued to the employees or directors.

The price of sweat equity shares to be issued to employees and directors should be at a fair price calculated by an independent valuer, says the draft rules.

All the Sweat equity shares issued to employees or directors would have a lock-in period of three years from the date of allotment.

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