Securities and Exchange
Board of India (Issue of Sweat Equity) Regulations, 2002[1] [24th
September, 2002] In exercise of the powers
conferred by Section 30 of the Securities and Exchange Board of India, 1992
read with Clause (d) of sub-sections (1) of Section 79-A as inserted by the
Companies (Amendment) Act, 1998 (Act 1 of 1999), the Board, hereby makes the following
regulations, namely:— Chapter
I PRELIMINARY (a) These regulations shall be
called the Securities and Exchange Board of India (Issue of Sweat Equity)
Regulations, 2002. (b) These regulations shall
come into force on the date of their publication in the Official Gazette. (1) In these regulations,
unless the context otherwise requires:— (a) ‘Act’ means the Securities
and Exchange Board of India Act, 1992; (b) ‘associate’ includes a
person, (i) who directly or indirectly
by himself or in combination with relatives, exercise control over the company;
or, (ii) whose employee, officer or
director is also a director, officer or employee of the company; (c) ‘Board’ means the Board as
defined in clause (a) of sub-section (1) of Section 2 of the Act; (d) ‘control’ shall include the
right to appoint majority of the directors or to control the management or
policy decisions exercisable by a person or persons acting individually or in
concert, directly or indirectly, including by virtue of their shareholding or
management rights or shareholders or voting agreements or in any other manner; (e) ‘company’ means a company
as defined in Companies Act, 1956; (f) ‘director’ means, a
director as defined in sub-section (13) of Section 2 of the Companies Act,
1956; (g) ‘employee’ means, (i) a permanent employee of the
company working in India or abroad; or (ii) a director of the company
whether a whole time director or not; (h) ‘ESOS’ means an Employee
Stock Option Scheme as defined in Securities and Exchange Board of India
(Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines,
1999; (i) ‘insider’ means an insider
as defined in clause (e) of Regulation 2 of Securities and Exchange Board of
India (Insider Trading) Regulations, 1992; (j) ‘merchant banker’ means a
merchant banker registered under Section 12 of the Act; (k) ‘promoter’ means promoter
as defined in clause (h) of sub-regulation (1) of Regulation 2 of the
Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997; (l) ‘registrar’ means a
registrar to an issue and includes a share transfer agent registered under
Section 12 of the Act; (m) ‘securities’ means
securities as defined in clause (h) of Section 2 of the Securities Contracts (Regulation)
Act, 1956 (Act 42 of 1956); (n) ‘statutory auditor’ means
an auditor appointed by a company under Section 224 of the Companies Act, 1956
(Act 1 of 1956); (o) ‘Recognised Stock Exchange’
means a stock exchange which has been granted recognition under Section 4 of
the Securities Contracts (Regulation) Act, 1956 (Act 42 of 1956); (p) ‘sweat equity shares’ means
sweat equity shares as defined in Explanation II of sub-section (1) of Section
79-A of the Companies Act, 1956; (q) ‘Schedule’ means a schedule
to these regulations. (r) ‘valuer’ means a Chartered
Accountant or a merchant banker appointed to determine the value of the
intellectual property rights or other value addition. (2) Words and expressions not
defined in these regulations shall have the same meaning as have been assigned
to them under the Act or the Securities Contracts (Regulation) Act, 1956 or the
Companies Act, 1956 or any statutory modification or re-enactment thereof, as
the case may be. Nothing contained in these
regulations shall apply to an unlisted company; Provided the unlisted company
coming out with initial public offering and seeking listing of its securities
on the stock exchange, pursuant to issue of sweat equity shares, shall comply
with the Securities and Exchange Board of India (Disclosure and Investor
Protection) Guidelines, 2000. Chapter
II ISSUE
OF SWEAT EQUITY BY A LISTED COMPANY A company whose equity
shares are listed on a recognized stock exchange may issue sweat equity shares
in accordance with Section 79-A of Companies Act, 1956 and these Regulations to
its— (a) Employees (b) Directors (1) For the purposes of passing
a special resolution under clause (a) of sub-section (1) of Section 79-A of the
Companies Act, 1956 the explanatory statement to be annexed to the notice for
the general meeting pursuant to Section 173 of the Companies Act, 1956 shall
contain disclosures as specified in the Schedule. (2) The issue of sweat equity
shares to promoters shall be subject to the requirements specified in
Regulation 6 of these Regulations. (1) In case of Issue of sweat
equity shares to promoters, the same shall also be approved by simple majority
of the shareholders in General Meeting; Provided that for passing such
resolution, voting through postal ballot as specified under Companies (Passing
of the resolution by Postal Ballot) Rules, 2001 shall also be adopted; Provided further that the
promoters to whom such Sweat Equity Shares are proposed to be issued shall not
participate in such resolution. (2) Each transaction of issue
of Sweat Equity shall be voted by a separate resolution. (3) The resolution for issue of
Sweat Equity shall be valid for a period of not more than twelve months from
the date of passing of the resolution. (4) For the purposes of passing
the resolution, the explanatory statement shall contain the disclosures as
specified in the Schedule. (1) The price of sweat equity
shares shall not be less than the higher of the following: (a) the average of the weekly
high and low of the closing prices of the related equity shares during last six
months preceding the relevant date; or (b) 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. Explanation: “Relevant
date” for this purpose means the date which is thirty days prior to the date on
which the meeting of the General Body of the shareholders is convened, in terms
of clause (a) of sub-section (1) of Section 79-A of the Companies Act. (2) If the shares are listed on
more than one stock exchange, but quoted only on one stock exchange on given
date, then the price on the stock exchange shall be considered. (3) If the share price is
quoted on more than one stock exchange, then the stock exchange where there is
highest trading volume during that date shall be considered. (4) If the shares are not
quoted on the given date, then the share price on the next trading day shall be
considered. (1) The valuation of the
intellectual property rights or of the know how provided or other value
addition mentioned in Explanation II of sub-section (1) of Section 79-A of the
Companies Act, 1956 shall be carried out by a merchant banker. (2) The merchant banker may
consult such experts and valuers, as he may deem fit having regard to the
nature of the industry and the nature of the property or other value addition. (3) The merchant banker shall
obtain a certificate from an independent Chartered Accountant that the
valuation of the intellectual property or other value addition is in accordance
with the relevant accounting standards. (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. In the General meeting
subsequent to the issue of sweat equity, the Board of Directors shall place
before the shareholders, a certificate from the auditors of the company that
the issue of sweat equity shares has been made in accordance with the
Regulations and in accordance with the resolution passed by the company
authorizing the issue of such Sweat Equity Shares. The amount of Sweat Equity
shares issued shall be treated as part of managerial remuneration for the
purpose 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. (1) The Sweat Equity shares
shall be locked in for a period of three years from the date of allotment. (2) The Securities and Exchange
Board of India (Disclosures and Investor Protection) Guidelines, 2000 on public
issue in terms of lock-in and computation of promoters' contribution shall
apply if a company makes a public issue after it has issued after it has issued
sweat equity. The Sweat Equity issued by
a listed company shall be eligible for listing only if such issues are in
accordance with these regulations. Any acquisition of Sweat
Equity Shares shall be subject to the provision of Securities and Exchange
Board of India (Substantial Acquisition of Shares and Takeovers) Regulations,
1997. Chapter
III GENERAL
OBLIGATIONS (1) The company shall ensure that— (a) The explanatory statement
to the notice for general meeting shall contain disclosures as are specified
under clause (b) of sub-section (1) of Section 79-A and sub-regulation (1) of
Regulation 5. (b) The Auditor's certificate
as required under Regulation 10 shall be placed in the general meeting of
shareholders. (c) The company shall within
seven days of the issue of sweat equity, issue or send statement to the
exchange, disclosing: (i) number of sweat equity
shares; (ii) price at which the sweat
equity shares are issued; (iii) total amount invested in
sweat equity shares; (iv) details of the persons to
whom sweat equity shares are issued; and (v) the consequent changes in
the capital structure and the shareholding pattern after and before the issues
of sweat equity. The Board may, on failure
of the merchant banker to comply with the obligations under these regulations
or failing to observe due diligence in respect of valuation of intellectual
property or value addition, initiate action against merchant banker in terms of
Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992. Chapter
IV PENALTIES
AND PROCEDURE (1) The Board may, suo-motu or
upon information received by it, cause an inspection to be made of the books of
account or other books and papers of any company or an investigation to be made
in respect of the conduct and affairs of any person associated with the process
of sweat equity, by appointing an officer of the Board [2][not
below the rank of Assistant General Manager for the purpose of conducting
inspection and not below the rank of Division Chief for the purpose of
conducting an investigation]: Provided that no such inspection
or investigation shall be made except for the purpose specified in
sub-regulation (2). (2) The purpose referred to in
sub-regulation (1) are the following, namely:— (a) to ascertain whether there
are any circumstances which would render any person guilty of having
contravened any of these regulations or any directions issued thereunder; (b) to investigate into any
complaint of any contravention of the regulation, received from any investor,
or any other person; (3) An order passed under the
sub-regulation (1) shall be sufficient authority for Inspecting or
Investigating Officer to undertake the inspection or investigation as the case
may be and on production of an authenticated copy of the order, the person
concerned shall be bound to carry out the duty imposed in Regulation 18. (1) It shall be the duty of
every person in respect of whom an inspection or investigation has been ordered
under Regulation 17, to produce before the inspecting or the investigating
officer such book, accounts and other documents in his custody or control and
furnish him with such statements and information as the said officer may
require from the purposes of the inspection or investigation. (2) Without prejudice to the
generality of the provisions of sub-regulation (1) such person shall— (a) extend to the Inspecting or
Investigating Officer reasonable facilities for examining any books, accounts
and other documents in his custody or control (whether kept manually or in
computer or in any other form) reasonably required for the purposes of the
inspection or investigation; (b) to provide such inspecting
or investigating officer copies of such books, accounts and records which, in
opinion of the Officer, are relevant to the inspection or investigation or, as
the case may be, allow him to take out computer printouts thereof. (c) to provide such assistance
and co-operation as may be required in connection with the inspection or
investigation and to furnish information relevant to such inspection or
investigation as may be sought by such officer. (3) The Inspecting or
Investigating Officer shall for the purpose of inspection or investigation,
have the full powers; (1) The Inspecting or
Investigating Officer shall, on completion of the inspection or Investigation
after taking into account all relevant facts and circumstances, submit a report
to the Board. (2) On the receipt of report
under sub-regulation (1), the Board may initiate such action as it may be
deemed fit to do in the interests of investors and the securities market. The Board may in the
interests of the securities market and without prejudice to its rights to initiate
action, including criminal prosecution under Section 24 of the Act or Section
621 of Companies Act give such directions as it deems fit including:— (a) directing the person
concerned not to further deal in securities in any particular manner; (b) directing the person
concerned to sell or divest the sweat equity shares acquired in violation of
the provisions of these Regulations or any other law or regulations; (c) prohibiting the persons
concerned, from accessing the securities market; (d) directing the disgorgement
of any ill-gotten gains or profits or avoidance of loss; (e) restraining the company
from making a further offer for sweat equity. SECURITIES
AND EXCHANGE BOARD OF INDIA (ISSUE OF SWEAT EQUITY) Regulations, 2002 [Under
Regulation 6(4)] The explanatory statement
to the notice and the resolution proposed to be passed in the general meeting
for approving the issuance of sweat equity shall, inter alia, contain the
following information: (a) The total number of shares
to be issued as sweat equity. (b) The current market price of
the shares of the company. (c) The value of the
intellectual property rights or technical know how or other value addition to
be received from the employee or director along with the valuation report/basis
of valuation. (d) The names of the employees
or directors or promoters to whom the sweat equity shares shall be issued and
their relationship with the company. (e) The consideration to be
paid for the sweat equity. (f) The price at which the
sweat equity shares shall be issued. (g) Ceiling on managerial
remuneration, if any, which will be affected by issuance of such sweat equity. (h) A statement to the effect
that he company shall conform to the accounting policies as specified by the
Board. (i) Diluted Earning Per Share
pursuant to the issue of securities to be calculated in accordance with
International Accounting Standards/standards specified by the Institute of
Chartered Accountants of India.Securities and Exchange Board of India
(Issue of Sweat Equity) Regulations, 2002
SCHEDULE