Can Sweat Equity Shares be issued to advisors and consultants?

Can Sweat Equity Shares be issued to advisors and consultants?

The key contributors to an organisation’s success are its employees, advisors and consultants. Each of these individual is worthy of appropriate compensation for their efforts towards making an organisation successful. Other than respecting and trusting their efforts and creating a safe environment, one positive way to reward their work is to grant them equity in the company. In this regard, it is pertinent to note that there are clear provisions in the Companies Act, 2013 which provide for the grant of sweat equity shares to employees and directors of a company.

SOURCE: FREEPIK

The provisions which provide for issuance of sweat equity shares to employees and directors are discussed below:

Section 2(88) of the Companies Act, 2013 defines “sweat equity shares” as:

‘such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called’.

As per Rule 8(1) of the Companies (Share Capital and Debentures) Rules, 2014, value addition means ‘actual or anticipated economic benefits that are created by the employees or directors and are either derived or are yet to be derived by the company’. Sweat equity shares are issued by way of either discount or consideration other than cash. This allows employees/directors to get a share in a part of the company’s profits as a return on their investment.

Further, rule 8(1) of the Companies (Share Capital and Debentures) Rules, 2014, defines an “Employee”

‘as an individual who is a permanent employee of the company and has been working in or outside India for at least a year, or a director of the company, regardless of being a whole-time director or not, or an employee or a director as defined above of the entity’s holding or subsidiary company in or outside India’. This definition does not include personal that are not working for the organisation on regular basis’.                                                                                                                                                 

Much to our surprise, our legislature lacked the maturity or resilience to include advisors, consultants and contractors in the pool of individuals to whom they envisaged issuance of sweat equity shares. To our mind, this group of independent professionals add substantial value to the growth of a company because of their diverse experience, passion and independent thought process. It is also seen that organizations are not equipped to manage these individuals as full time employees for varied reasons. One of the many reasons being the cost and several other intangible ones which add to the skills these individuals offer. For example, several independent professionals are not wired to function within contemporary organizational structures. However, the best in the market always finds ways to reward the best talent, be it an employee, director, advisor or consultant. Hence, an alternative route has developed for issuing sweat equity to even advisors, consultants and contractors.

Here the company issues shares to its consultants, advisors and contractors under the provisions for ‘preferential allotment’ under the Companies Act, 2013. This can be carried out pursuant to an extraordinary general meeting resolution. These shares can be issued for cash or non-cash consideration.

Source: Freepik

 

To sum up, rewarding advisors, consultants, contractors and actually even partners in the form of equity can benefit organisations immensely. Adding them as stakeholders helps bring unfettered knowledge, increased commitment and diverse experience in complex areas of business and practice, to the organization.  Further, in order to encourage this practice in the industry, the definition of sweat equity shares should be optimized to include advisors, consultants and contractors. To our mind this optimization will add substantially to the growth of organizations and India’s GDP.

 

Written by Pritika Kumar and Vedanshi Pundir.

Disclaimer: The information contained in this site is provided for informational purposes only and should not be construed as legal advice on any subject matter. For any company law related query or assistance, reach out to us at help@cornelliachambers.com.

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