sweat equity shares - intangible assets and value addition

1.            Section 79A of the Companies Act, 1956 [the Act] permits a company to issue a “Sweat Equity Shares” [SES] of a class of shares already issued subject to certain conditions.

2.            In respect of a listed company the Securities and Exchange Board of India [SEBI] has issued the SEBI [Issue of Sweat Equity] Regulations, 2002 [SEBI Regulations].

3.            In respect of unlisted companies, the Ministry of Corporate Affairs [MCA] had issued the Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003 [MCA Rules].

4.            Section 79A of the Act, states by way of an Explanation “SES” means Equity Shares issued by a Company to its ‘Employees’ or ‘Directors’ at a Discount or for a 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. Therefore whether SES are issued by a Listed Company or an Unlisted Company, they are supposed meet the purpose and nature specified in the Explanation under Section 79A of the Act.

5.            As Section 79A of the Act clearly states that a company may issue SES of a ‘Class of Shares’ already issued, it would mean that the Equity Shares that are proposed to be issued as SES have to be either Equity Shares with voting rights or Equity Shares with differential rights as to be dividend, voting or otherwise.

6.            Under the MCA Rules, as “Intangible Asset” means “an identifiable non-monetary asset, without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes”. MCA Rules define a “Value Addition” as “an anticipated economic benefits derived by the enterprises  from expert and/or professional for providing know-how or making available rights in the nature of intellectual property rights, by such person to whom SES are being issued for which the consideration is not paid or included in -

a.    The normal remuneration payable under the contract of employment in the case of an employee and/or;

b.    Monetary consideration payable under any other contract, in the case of non-employee”.