Specified Security and Sweat Equity shares

SPECIFIED SECURITY AND SWEAT EQUITY SHARES

The law makers at the Center has brought out a legislation by which certain specific and specialized benefits conferred to certain selective persons within the scope of he Fringe Benefits Tax. Discussion has already been made in this form as to the manner Fringe Benefits Tax is sought to be imposed such as items covered the extent of tax as also the entities who are to suffer this tax.

In this brief, two specific items are sought to be analyzed:
Section 115WB(1)(d) brings within its scope specified security or sweat equity shares allotted or transferred directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees)

The two specific items assuming importance from the point of view of Fringe Benefits tax is

1. Specified Security and
2. Sweat Equity Shares

Specified security has been defined under the Securities Contracts (Regulation) Act 1956, asunder:

"Securities" include-

1. shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
1. derivative;
2. units or any other instrument issued by any collective investment scheme to the investors in such schemes;5
2. Government securities;
   
   1. such other instruments as may be declared by the Central Government to be securities; and 6
3. rights or interests

It can be seen from the definition that all forms of securities, including debentures, debenture stock as also derivatives such as rights, Bonus issues are also brought within the scope. The allotment of these instruments are invariably borne out of extra ordinary considerations, more so with a view to appease the employees in general, with a view to motivate them into better contribution and to create a situation that they also participate in the growth of the organization and themselves growing along side.

While the assignment of securities would attract a class as a whole, in an industry, there are certain noted and distinct institutions that require extra ordinary skill and acumen to create a globally challenging task. Such industries specifically in their race to mobilize supporting working force and talents, attract intellectuals whose Intellectual Property Rights could be shared, distinct Know How on any project or operations are provided or any other value additions, such as mobilizing resources, assistance in the matter of establishing infrastructural facilities, can be extended to the institution by such persons.. These persons endowed with unparalleled skill and expertise are offered a participation in the management and owner ship of the enterprise. The offer is in recognition of their sweat and toil put forth for the growth of the entity. Such offer is other wise styled as “Sweat Equity Shares”. Unlike specified securities discussed earlier “Sweat Equity Shares” carry with it numerous procedures, some of them are briefly discussed below:

SWEAT EQUITY SHARES:
Section 79A of the Companies Act stipulates that

1. The issue of sweat equity shares should be authorized by a special resolution of the General Meeting
2. The number of shares to be issued, its current market rate, consideration, if any and the class of persons to whom it is proposed to be issued
3. At the time of issue, the company ought to have completed at least one year of is commencement of business
4. The shares issued of a company whose shares are listed in the stock exchange should adhere to the norms of the SEBI.

Further the definition rendered for Sweat Equity shares under the Companies Act is “ equity shares issued by the company to its employees or directors at a discount or for consideration other than cash for providing know how or making available rights in the nature of intellectual property rights or value additions, by what ever name called”

The other conditions are that the sweat equity shares issued should not be more than 15% of the total paid up capital or Rs.5 crores which ever is greater and if the ceiling is exceeded, prior approval of the Central Government should be obtained..

The price of the sweat equity share shall be at a price decided by an independent valuer and the lock in period is 3 years from the date of allotment.(i.e. the allottees are restrained in alienating such shares within the lock in period)

The company which proposes to issue sweat equity shares should clearly furnish along with the notice for the General meeting information comprising of

1. date of the meeting and the date on which the directors approved the issue of sweat equity shares
2. reasons/justification for the issue
3. Number of shares, consideration for shares and class of persons to whom the shares are to be issued
4. value of sweat equity shares along with a report of the valuer
5. names of persons for whom sweat equity shares are to be issued and the persons’ relationship with the company
6. ceiling on the Managerial remuneration if any, which will be affected by the issue of such shares
7. a clear statement conveying that the company shall stick to the accounting policies of the Central Government &
8. diluted earning per share pursuant to the issue of securities to be calculated in accordance with the Accounting Standards specified by he Institute of Chartered Accountants of India.

In cases where shares are proposed to be issued for consideration other than cash, the valuation of the Intellectual Property or know how shall be critically examined by an independent valuer who shall consult experts, considering the nature of industry and the nature of property as also the value additions. He would submit an appraisal report, which would be placed at the General meeting. The value of shares allotted to Directors or Managers shall be treated as their remuneration, as they are issued for non cash consideration which does not take the form of asset that can be carried to the balance sheet.

According to SEBI’s notification the price of sweat equity share should not be less than the higher of

1. the average of the weekly high and low of the closing prices of the related equity shares during the last six months preceding he relevant date (date of issue)
2. the average of the weekly high and low of the closing prices of the related equity shares during the two weeks preceding the date of issue.

The company shall within 7 days of allotment of such shares furnish a detailed statement to the Stock Exchange, furnishing the name and address of persons, the number of shares issued, the total amount invested in sweat equity shares and the consequent change in the share capital structure.

It can be seen from the information discussed earlier that the issue of Sweat Equity shares has assumed tremendous importance, as each industry has to out with the other in excellence of business, profit earning and more than anything else retain in perpetuity the think tank of the intellectuals who are the engineers of brain orchestrating any industry.

It is in keeping with such spirit of dynamism in achieving greater goals, Mukesh Ambani reportedly had renounced 12% of his Sweat equity shares, numbering 50 crores, valued at Rs.5000 crores. This way the best of the employees are retained, they are highly motivated to perform better and enhance the reputation of the company viz-a-viz their meritorious status. Even though Employees’ stock option does not involve so much rigour as the Sweaty Equity shares, yet considering the potential in the Industrial growth, the netting in of highly talented workforce, who can contribute to spectacular views, the scheme of Sweat Equity shares is very much worth the name, that is more relevant today with high targets projected for industrial growth.