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3-year lock-in for sweat equity

BS Markets Bureau in Mumbai

The Securities and Exchange Board of India has prescribed a three-year lock in for sweat equity.

Sweat equity is shares issued in consideration of value offered to the company in terms of services, know how, intellectual property rights, etc. That is, if you provide the company services in return of which it gives you shares, then such shares are called sweat equity.

Stock options, however, are offered to employees as an incentive. In stock options, employees get the chance to take stock in companies at a value lower than market value. Companies offer these instruments to employees as a part of their remuneration and to retain them in the long run.

Sebi has issued regulations for the issue of sweat equity by listed companies in India. The shares issued will be subject to Sebi's takeover code.

The shares issued as sweat equity shall be locked in for three years from the date of allotment.

Sebi's disclosure and investor protection guidelines on public issues in terms of lock-in and computation of promoters' contribution shall apply if a company makes a public issue after it has issued sweat equity.

The sweat equity issued by a listed company shall be eligible for listing only if such issue is in accordance with these regulations.

According to Sebi guidelines, notified on September 24, 2002, a listed company can issue sweat equity to its employees and its directors with the approval of the ordinary shareholders through a special resolution.

In the case of issue of sweat equity shares to promoters, the proposal has to be approved by a simple majority of the shareholders in a general body meeting.

For passing such a resolution, voting through postal ballot has to be adopted, Sebi has specified. The promoters to whom the shares are being issued should not participate in the resolution, it has added.

Each transaction of the issue of sweat equity has to be voted through a separate resolution. The resolution for the issue of sweat equity shall be valid for not more than 12 months from the date of the passing of the resolution, the regulations say.

The notification also has details on the pricing of the shares issued by way of sweat equity.

The shares issued should not be priced less than the higher of the average of the weekly high and low of the closing prices of the related equity shares during last six months preceding a relevant date, or the average of the weekly high and low of the closing prices of the related equity shares during the two weeks preceding the relevant date.

The relevant date starts 30 days prior to the date on which the annual general meeting is held.

Sebi has mandated the appointment of merchant bankers to undertake the valuation of intellectual property rights.

Merchant bankers will have the freedom to consult industry experts, but have to obtain a certificate from an independent chartered accountant that the valuation is in accordance with relevant accounting standards.

If the sweat equity is issued for non-cash consideration such as a depreciable or amortisable asset, for accounting purposes it shall be carried to the balance sheet in accordance with the relevant accounting standards.

Where no such assets are involved, it shall be expensed as provided in the relevant accounting standards.

For managerial level personnel, the amount of sweat equity issued shall be treated as part of remuneration provided they are issued to any director or manager and 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.

Within seven days of the issue of sweat equity, the company has to intimate the concerned stock exchange with details of the number of such shares issued and the total amount involved, the pricing, details of the persons to whom sweat equity shares are issued, and the consequent changes in the capital structure and the shareholding pattern after and before the issue of sweat equity.

The guidelines also specify penalties and procedures to be followed if the regulations are not followed strictly.

The Sebi board can inspect the books of accounts of the company concerned as well as the merchant bankers involved and initiate investigations if needed.

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