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Richa Mishra

New Delhi , Dec. 3

THE Government's approval will soon become mandatory for the issuance of sweat equity by unlisted companies beyond a specified level.

The Department of Company Affairs (DCA) proposes to impose this restriction in cases where unlisted companies are looking at issuing such shares aggregating more than 15 per cent of the total paid-up equity capital in a year or shares of the value of Rs 5 crore, whichever is higher.

The restriction is to be defined in the proposed rules for unlisted companies for issuance of sweat equity shares.

`Sweat equity shares' as per the Companies Act, are equity shares issued by a company to employees or directors at a discount or for consideration other than cash for providing knowhow or making available rights in the nature of intellectual property rights or value additions.

On the issue of pricing of such shares the rules are likely to stipulate that an independent valuer would calculate the price. Further, a three-year lock-in period from the date of allotment of such shares is also envisaged.

For those companies, which propose to issue such shares for consideration other than cash, as per the proposed rules, the valuation of the intellectual property or of the knowhow provided or other value addition to consideration, at which sweat equity capital is issued, would be carried out by a valuer.

Besides, a company would be required to give justification for issue of such shares for consideration other than cash, which should form part of the notice sent for the general meeting.

The proposed rule is also likely to stipulate that the amount of such shares issued would be treated as part of managerial remuneration as prescribed for the purposes of certain sections under the Companies Act — if such shares are issued to any director or managers, and they are issued for non-cash consideration, which does not take the form of an asset that can be carried to the company's balance-sheet.

Further, the explanatory statement to be annexed to the notice for the annual general meeting would contain the date of the meeting at which the proposal was approved by the board of directors. The statement should also disclose the ceiling on managerial remuneration that will be affected by issuance of such equity.

Shareholders approval by way of a separate resolution at the AGM is also being mandated 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) of the company when granting such shares.

The rule is set to outline the disclosures to be made in the director's report such as number of shares to be issued to the employees or the directors and the pricing formula.

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