Company : Sol Infotech Pvt. Ltd. Website : www.courtkutchehry.com Securities and Exchange Board of India (Issue of Sweat Equity) Regulations, 2002 CONTENTS CHAPTER 1 :- PRELIMINARY 1. Short title and commencement 2. Definitions 3. Applicability CHAPTER 2 :- ISSUE OF SWEAT EQUITY BY A LISTED COMPANY 4. Sweat equity shares may be issued to employee, promoter 5. Special Resolution 6. Issue of Sweat Equity Shares to Promoters 7. Pricing of Sweat Equity Shares 8. Valuation of Intellectual Property 9. Accounting Treatment 10. Placing of Auditors Certificate Before Annual General Meeting 11. Ceiling on Managerial Remuneration 12. Lock-in of sweat equity shares 13. Listing 14. Applicability of Takeover CHAPTER 3 :- GENERAL OBLIGATIONS 15. Obligations of the Company 16. Action against intermediaries CHAPTER 4 :- PENALTIES AND PROCEDURE 17. Power of the Board to order inspection or investigation 18. Duty to produce records, etc 19. Submission of Report to the Board 20. Power of the Board to issue directions SCHEDULE 1 :- SCHEDULE Securities and Exchange Board of India (Issue of Sweat Equity) Regulations, 2002 In exercise of the powers conferred by Sec. 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) read with clause (d) of sub-sec. (1) of Sec. 79-A of the Companies Act, 1956 (1 of 1956) as inserted by Companies (Amendment) Act, 1999 (1 of 1999), the Board, hereby, makes the following regulations, namely : CHAPTER 1 PRELIMINARY 1. Short title and commencement :- (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. 2. Definitions :- (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, exercises control over the company; or, (ii) whose employee, officer or director is also a director, officer or employee of another company; (c) "Board" means the Board as defined in clause (a) of sub-sec. (1) of Sec. 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 the Companies Act, 1956; (f) "director" means, a director as defined in sub-sec. (13) of Sec. 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 Employees Stock Option Scheme as defined in Securities and Exchange Board of India (Employees Stock Option Scheme and Employees 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 (Prohibition of Insider Trading) Regulations, 1992; (j) 'merchant banker' means a merchant banker registered under Sec. 12 of the Act; (k) "promoter" means promoter as defined in clause (h) of sub- regulation (1) of Reg. 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 Sec. 12 of the Act; (m) "Securities" means securities as defined in clause (h) of Sec. 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (n) "statutory auditor" means an auditor appointed by a company under Sec. 224 of the Companies Act 1956 (1 of 1956); (o) "Recognised Stock Exchange" means a stock exchange which has been granted recognition under Sec. 4 of the Securities Contract (Regulation) Act, 1956 (42 of 1956); (p) "sweat equity shares" means sweat equity shares as defined in Explanation II of sub-sec. (1) of Sec. 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 Contract (Regulation) Act, 1956 or the Companies Act, 1956, or any statutory modification or re- enactment thereof, as the case may be. 3. Applicability :- 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 2 ISSUE OF SWEAT EQUITY BY A LISTED COMPANY 4. Sweat equity shares may be issued to employee, promoter :- A company whose equity shares are listed on a recognised stock exchange may issue sweat equity shares in accordance with Sec. 79-A of Companies Act, 1956 and these Regulations to its (a) Employees (b) Directors 5. Special Resolution :- (1) For the purposes of passing a special resolution under clause (a) of sub-sec. (1) of Sec. 79-A of the Companies Act, 1956 the explanatory statement to be annexed to the notice for the general meeting pursuant to Sec. 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. 6. Issue of Sweat Equity Shares to Promoters :- (1) In case of issue of sweat equiry 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. 7. Pricing of Sweat Equity Shares :- (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- sec. (1) of Sec. 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 the given date, then the price on that 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 shares are not quoted on the given date, then the share price on the next trading day shall be considered. 8. Valuation of Intellectual Property :- (1) The valuation of the intellectual property rights or of the know- how provided or other value addition mentioned in Explanation II of sub-sec. (1) of Sec. 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. 9. Accounting Treatment :- (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. 10. Placing of Auditors Certificate Before Annual General Meeting :- I n 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. 11. Ceiling on Managerial Remuneration :- The amount of Sweat Equity shares issued shall be treated as part of managerial remuneration for the purposes of Secs. 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. 12. Lock-in of sweat equity shares :- (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 (Disclosure 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 issue sweat equity. 13. Listing :- The Sweat Equity issued by a listed company shall be eligible for listing only if such issue are in accordance with these regulations. 14. Applicability of Takeover :- 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 3 GENERAL OBLIGATIONS 15. Obligations of the Company :- (1) The company shall ensure that (a) The Explanatory Statement to the notice for general meeting shall contain certain disclosures as are specified under clause (b) of sub-sec. (1) of Sec. 79-A of the Companies Act, 1956 and sub- regulation (1) of Regulation 5. (b) 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 recognized stock 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 issue of sweat equity. 16. Action against intermediaries :- 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 the merchant banker in terms of Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992 CHAPTER 4 PENALTIES AND PROCEDURE 17. Power of the Board to order inspection or investigation :- (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 1 [Board 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 purposes specified in sub-regulation (2). (2) The purposes 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 there under; (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 the 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. THE WORDS INSERTED BY THE Securities and Exchange Board of India (Issue of Sweat Equity) (Amendment) Regulations, 2003 [Noti. No. F. No. SEBI/LGL/17339/2003, dt. 27.8.2003 Gaz. of India, Exty., Pt. II-Sec. 3(ii), No. 771, dt. 27.8.2003, p. 2.] 18. Duty to produce records, etc :- (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) 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) provide such assistance and co-operation as may be required in connection with the inspection or investigation and 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; (a) of summoning and enforcing the attendance of persons; (b) to examine orally and to record on oath the statement of the persons concerned, any director, partner, member or employee of such person. 19. Submission of Report to the Board :- (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. 20. Power of the Board to issue directions :- The Board may in the interests of the securities market and without prejudice to its right to initiate action including criminal prosecution under Sec. 24 of the Act or Sec. 621 of Companies Act, 1956 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 profit or avoidance of loss. (e) restraining the company from making a further offer for sweat equity. SCHEDULE 1 SCHEDULE (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 alongwith 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 the 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.