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|January 20, 1998||
The software industry's wish list scores againThe Department of Company Affairs has cleared the issue of sweat equity, or equity issued for considerations other than cash.
Indian companies can now go ahead with any sweat equity schemes they may have.
The new interpretation of the law is expected to benefit the electronics and information technology industries, which have a high employee turnover.
Financial sector organisations like private banks, investment banking firms, insurance companies, the mutual funds industry and non-banking finance companies could also use sweat equity to attract and retain key employees.
With corporate operations becoming more global in their professional outlook, sweat equity has emerged as the ideal tool for pooling the expertise of professional managers and entrepreneurs to set up professionally run organisations.
Initially, the professional manager brings in only his expertise and the entrepreneur invests the capital. Over a period of time, the manager earns shares in lieu of his salary or as part of his salary. This enables the executive to build up a substantial shareholding in the company, providing him an incentive to stay on with the organisation.
Though sweat equity is common abroad, Indian companies have so far not issued sweat equity under the impression that it is not legally permitted.
Though the Indian Company Law contains explicit provisions for the issue of shares at a premium or at a discount, the legal position is not that clear on the issue of shares where no cash has been paid.
However, the DCA has now interpreted the provisions of Section 75 of the Companies Act, 1956, as allowing the issue of sweat equity.
The interpretation is based on Clause 1(b) of the section. This clause lays down the various conditions for filing a statement by a company allotting shares.
The statement has to be filed with the registrar of companies within 30 days of the allotment of shares. In its statement, the company is required to provide details like the number and nominal amount of shares, the names, addresses and occupation of those allotted the shares and the amount, if any paid, or due and payable on each share.
Clause 1(b) provides that in case of shares (which are not bonus shares) that are allotted as fully or partly paid up 'otherwise than in cash', the company is required to produce before the RoC for inspection 'a contract in writing, constituting the title of the allottee to the allotment, together with any contract of sale, or a contract for services or other consideration in respect of which the allotment has been made'.
Since this interpretation is drawn from the existing Act and not from the proposed new Companies Act, it means that any management which wants to issue sweat equity can go ahead with its plans immediately.
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- Compiled from the Indian media
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