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Lesson 5: Shares, Sweat Equity, Alteration of Share Capital, and Buy-Back notes for B.Com, CA & CS

Stacked interlocking blocks labeled Equity, Reserves, and Capital

🧑‍💼 Employees (Rule 8(1), Companies (Share Capital & Debentures) Rules, 2014)

  • Permanent employee (India or abroad)
  • Director (whole-time or not)
  • Employee/director of subsidiary or holding company (India or abroad)

💡 Sweat Equity Shares (Section 54, Companies Act, 2013)

Conditions

  1. Special Resolution authorizing issue (valid for 12 months).
  2. Resolution must state: number of shares, market price, consideration, class of employees/directors.
  3. SEBI compliance (if listed).
  4. Sweat equity = same rights as equity shares.
  5. Lock-in period: 3 years.
  6. Valuation: By registered valuer (fair price, IPR/know-how report).
  7. Limits:
    • Max 15% of paid-up equity in a year or ₹5 crore (whichever higher).
    • Max 25% of paid-up equity at any time.
    • Startups: up to 50% for 10 years.

Accounting Treatment

  • Non-cash consideration:
    • Depreciable asset → balance sheet.
    • Otherwise → expense.
  • If issued to directors/managers → part of managerial remuneration.
  • If issued for asset acquisition → asset recorded; excess treated as compensation.
  • If not for asset → treated as compensation in financials.

Disclosure (Board Report)

  • Class of directors/employees, number of shares, justification, terms, pricing formula, EPS dilution, etc.

Register

  • Maintain Form SH.3 at registered office.

📈 Alteration of Share Capital (Section 61)

  • Increase authorized capital.
  • Consolidation/division of shares (requires Tribunal approval if voting % changes).
  • Conversion of shares into stock.
  • Sub-division into smaller shares.
  • Cancellation of unissued shares.

⚠️ Notes:

  • Cancellation ≠ reduction of capital.
  • Requires authority in Articles; if absent, amend Articles by special resolution.
  • File Form MGT-14 (Articles amendment) and Form SH-7 (with ROC within 30 days).
  • Penalty: ₹500/day (max ₹5 lakh company, ₹1 lakh officer).

🔄 Buy-Back of Securities (Sections 68–70)

Sources

  • Free reserves.
  • Securities premium account.
  • Proceeds of issue of other shares/securities (not same kind).

Conditions

  1. Authorization in Articles.
  2. Approval:
    • Board → up to 10% of paid-up capital + free reserves.
    • Shareholders (special resolution) → up to 25%.
  3. Quantum: Max 25% of paid-up capital + free reserves (equity buy-back limited to 25% of paid-up equity).
  4. Debt-equity ratio ≤ 2:1 (Govt. NBFC/HFC companies → 6:1).
  5. Only fully paid-up shares.
  6. Time gap: 1 year between buy-backs.
  7. Completion: within 1 year of resolution.
  8. Methods: proportionate from shareholders, open market, employee stock/sweat equity.
  9. Extinguishment: destroy shares within 7 days of completion.
  10. No further issue of same kind for 6 months (except bonus, conversion obligations).
  11. Offer period: 15–30 days (can be <15 if all members agree).
  12. Register: Form SH-10.
  13. Letter of offer: Form SH-8 (filed with ROC).
  14. Declaration of solvency: Form SH-9.
  15. Return of buy-back: Form SH-11.
  16. Bank account: open separate account for buy-back consideration.
  17. Proportionate acceptance if oversubscribed.

Penalty

  • Company: ₹1–3 lakh.
  • Officer in default: ₹1–3 lakh.

Explanatory Statement (Rule 17)

  • Date of Board approval, objectives, class of shares, number, method, price, basis, max amount, sources, time-limit, promoter holdings, confirmations (no defaults, solvency), auditor’s report, etc.

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