Sweat equity Shares

To address the scenario provided, it involves the issuance of sweat equity shares under the Companies Act, 2013, which is governed by Section 54. ### Sweat Equity Shares and Their Provisions: 1. **Meaning of Sweat Equity Shares**: Sweat equity shares refer to shares issued by a company to its directors or employees at a discount or for consideration other than cash, in exchange for: - Intellectual property rights, or - Providing know-how or value additions such as skills and efforts for the growth of the company. 2. **Conditions under Section 54 of the Companies Act, 2013**: - The company must pass a special resolution in the general meeting to issue sweat equity shares. - Sweat equity shares can be issued to directors or employees. - The resolution should specify the number of shares, current market price, consideration if any, and the class of directors or employees to whom such shares are issued. - The company should not have issued sweat equity shares exceeding 25% of the paid-up capital in a year. - The sweat equity shares issued must be locked in for a minimum of three years. 3. **Valuation of Sweat Equity Shares**: - The valuation of the intellectual property or know-how should be conducted by a registered valuer. - For non-cash consideration, the valuation report and basis should be presented to the shareholders. ### Accounting Treatment for Non-Cash Consideration: In this case, **"Hum Aur Tum Ltd"** is issuing sweat equity shares for non-cash consideration in the form of machinery, patents, and stock. The accounting treatment for this is as follows: 1. **Machinery (₹10 lakh)**: - Debit: Machinery (Fixed Asset) ₹10 lakh - Credit: Share Capital (₹20 per share) and Securities Premium (for excess over face value) 2. **Patents (₹3 lakh)**: - Debit: Intangible Asset (Patent) ₹3 lakh - Credit: Share Capital (₹20 per share) and Securities Premium (for excess over face value) 3. **Stock (₹12.5 lakh)**: - Debit: Inventory ₹12.5 lakh - Credit: Share Capital (₹20 per share) and Securities Premium (for excess over face value) ### Conclusion: In the light of the Companies Act, 2013, the issuance of sweat equity shares in this manner is permissible, provided it follows the outlined conditions such as passing a special resolution, proper valuation of assets, and lock-in of shares for three years. The accounting treatment involves debiting the respective assets and crediting the share capital and securities premium based on the face value of ₹20 per share.

siddesh N

CA Inter

★ 3K+

02-Oct-24 14:42