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Chapter 1 - Introduction Lesson 1- Finance and it’s role. Business is all about money and money in business terms are euphemistically called as Finance which is nothing but better and sophisticated version of money. Actually, Finance has a bigger and more complex meaning and role than money. Money is just a nominal value or a unit of transaction whereas Finance is money plus management of money. The moment management gets associated with money it means the complete detail of money involved in a transaction, its history, present and future interpreted in multiple ways, ratios and features. Anh business person must have, to a certain degree, the understanding of finance as it helps in making big and small business decisions. Regardless of which department a person belongs to, he or she need to have a fair knowledge and understanding of some important concepts of Finance. And this hold true for lawyers as well, especially the lawyers who are employed with corporates as Inhouse Legal Counsels and Contract Managers.   Lesson 2 - Importance of knowledge of finance for Lawyers, Inhouse Counsels and Contract Managers Lawyers in corporate world, especially the Inhouse Counsels and Contract Mangers play a role bigger than what a normal advocate would play. These people have to wear multiple hat on top of the Lawyer’s hat. It is pertinent for a Corporate Counsel to know all about the applicable laws in his or her area of expertise but at the same time the moment one joins a company or an organization as a counsel, he or she has to know and understand the nuances of business by walking few steps beyond the legal world. The usual expectation of the business leaders and other team members from a counsel or a contract manager is that they would understand the underlying risk and help in building the revenue from every business transaction whether within the organization or outside. For a contractual transaction, a counsel or a contract manager is not only supposed to point the legal risk involved in the contract but also to highlight and provide solution, if any, on quantum of money involved, revenue management, money at risk management, service credit implication, invoice and credit cycle etc. It has been observed that a lawyer with finance understanding is always sought after and proves to be a great asset to an organization.   Lesson 3- High level view of financial concepts – Balance Sheet and Profit and Loss Account BALANCE SHEET       The balance sheet tells us what the company owns (its assets), what it owes (its liabilities) and the value of the business to its stockholders (the shareholders' equity) as of a specific date. It's called a balance sheet because the two sides balance out. It can be elaborated like this:  a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders' equity). Balance sheet is a snapshot of a financial condition of a company. It tells the exact financial conditions at a particular point of time or date as mentioned on the balance sheet. The three major items on the balance sheet are Assets, Liabilities and Shareholders’ equity. The normal formula to balance out the items in a balance sheet is as follow; Total Assets = Total Liabilities + Shareholders’ Equity   Assets - Assets are economic resources that are expected to produce economic benefits for their owner   Liabilities _- Liabilities are obligations the company has to outside parties. Liabilities represent others' rights to the company's money or services. Examples include bank loans, debts to suppliers and debts to employees. Shareholders’ Equity - Shareholders' equity is the value of a business to its owners after all of its obligations have been met. It generally reflects the amount of capital the owners have invested, plus any profits generated that were subsequently reinvested in the company.   PROFIT AND LOSS ACCOUNT (INCOME STATEMENT) An income statement or profit and loss statement is a financial statement that reports a company's financial performance over a specific accounting period, usually a financial year. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period. Unlike the balance sheet, which covers one moment in time, the income statement provides performance information about a time period. The income statement is divided into two parts: operating and non-operating. The operating portion of the income statement discloses information about revenues and expenses that are a direct result of regular business operations. For example, if a business makes and sells aircraft, it should make money through the sale and/or production of aircraft. The non-operating section discloses revenue and expense information about activities that are not directly tied to a company's regular operations. Continuing with the same example, if the aircraft company investment securities, the gain from the sale is listed in the non-operating items section.   Chapter 2- Balance Sheet- Important Financial concepts Lesson 1 – Asset Assets are sometimes defined as resources or things of value that are owned by a company. Some examples of assets which are obvious and will be reported on a company's balance sheet include: cash, accounts receivable, inventory, investments, land, buildings, and equipment. An asset is an item that the company owns, with the expectation that it will yield future financial benefit. This benefit may be achieved through enhanced purchasing power (i.e., decreased expenses), revenue generation or cash receipts. There are broadly two types of Assets namely, Current Assets and Long Terms Assets. Current Assets - Current assets are those assets that you expect to either convert to cash or use within one year, or one operating cycle?whichever is longer. Examples of current assets include cash, accounts receivable and inventory (e.g., raw materials, work in progress, finished goods). Long Term Assets - Long-term assets are those that you use in the operation of your company and that will continue to offer benefit beyond a single year or operating cycle. Examples of long-term assets include buildings, machinery and equipment (also known as fixed or capital assets). Many long-term assets are amortized as they are used.   Lesson 2- Liability The opposite of assets are liabilities. Liabilities are amounts that the company owes and will have to settle in the future. Like Asset there are two kinds of liabilities namely Current Liabilities and Long Terms Liabilities. Current Liabilities - Current liabilities are those that are expected to be settled within one year, or one operating cycle?whichever is longer. Examples of current liabilities include accounts payable, demand loans and current portions of long-term liabilities.   Long Term Liabilities - Long-term liabilities include ongoing commitments such as loans, mortgages, debentures, finance leases and other long-term financing arrangements.   Lesson 3 – Shareholders’ equity Shareholder's Equity consists of two main things: The initial capitalization of the company (when the shares were first sold, plus extra share issues) and retained earnings, which is the amount of money the company has made over and above capitalization, which has not been re-distributed back to shareholders.   Shareholder's Equity is neither an asset nor a liability: it is used to purchase assets and to reduce liabilities, and is simply a measure of assets minus liabilities that is necessary to make the accounting equation balance. Chapter 3- Profit and Loss Account – Important Financial Concepts Lesson 1- Revenue (Top line) Revenue for a company is the total amount of money received by the company for goods sold or services provided during a certain period of time usually a year. It is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is also called as the "top line" or "gross income" figure from which costs are subtracted to determine net income Lesson 2- Expenses An expense is defined as an outflow of money or assets to another individual or company as payment for an item or service. It is the money spent or cost incurred in an organization's efforts to generate revenue, representing the cost of doing business. Expenses may be in the form of actual cash payments (such as wages and salaries), a computed expired portion (depreciation) of an asset, or an amount taken out of earnings (such as bad debts).   Lesson 3- Gross Profit Gross profit is a company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit is important because it reflects the core profitability of a company before overhead costs, and it illustrates the financial success of a product or service.   Lesson 4- Operating Profit The difference between revenues and costs generated by ordinary operations, before deducting interest, taxes, investment gains/losses and various non-recurring items. Operating profit is the profit earned from a firm's normal core business operations. This value does not include any profit earned from the firm's investments, such as earnings from firms in which the company has partial interest, and the before the deductions of applicable interest and taxes owed.   Lesson 5-  Profit before Tax Profit before tax (PBT) is a profitability measure that looks at a company's profits before the company has to pay corporate income tax by deducting all expenses from revenue including interest expenses and operating expenses except for income tax.   Lesson 6- Profit After Tax (PAT) The net amount earned by a business after all taxation related expenses have been deducted. The profit after tax is often a better assessment of what a business is really earning and hence can use in its operations than its total revenues. It is also called as Net Income After Tax or “Bottom Line”. Lesson 7- Gross Margin Gross margin is a company's total sales revenue minus its cost of goods sold (COGS), divided by total sales revenue, expressed as a percentage.     Chapter 4 – Financial concepts used in Service Contracts -I Lesson 1 – Total Contract Value Total contract value (TCV) represents the full value of a customer contract. It includes both recurring and one-time payments. It is the maximum amount that can be generated from a contract in a normal business scenario. Lesson 2 – Client Budget Client Budget is not an important financial term from Contracts point of view but is important from sales point of view as the knowledge of client budget helps in packaging the solution and offerings in a way that appears lucrative to the Client. Knowledge of client budget helps in creating the contract winning proposal. Lesson 3- Committed Revenue Usually it is Committed Monthly Recurring Revenue (CMRR). Committed Monthly Recurring Revenue is the value of recurring portion of subscription revenue. For term-based subscription businesses, this is the portion of subscription revenue that is recognized each month. In layman’s language, it is the minimum amount that a service provider would get from the Customer each month. Lesson 4- Cost In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery of a good or service. Lesson 5- Cash Flow In accounting, cash flow is the difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance). It is called positive if the closing balance is higher than the opening balance, otherwise called negative.   Lesson 7- Margin (Engagement/ Realised) Margin is the difference between a product or service's selling price and its cost of production or to the ratio between a company's revenues and expenses. For a service contract margin is the amount of revenue that the service would generate minus the cost incurred in delivering the services. There are two kinds of margin for a service contract and which defines the financial success of that contract. Engagement Margin - It is the theoretical margin that one expects while starting a service contract. Realized Margin- Is the actual margin that one realizes at the end of service contract or the financial year. Historically it has been observed that Realized margin is always less than the engagement margin for Service Contracts due to cost escalations.   Lesson 7 – Net Present value (NPV) Net present value is a calculation that compares the amount invested today to the present value of the future cash receipts from the investment. In other words, the amount invested is compared to the future cash amounts after they are discounted by a specified rate of return. For a service contract, the NPV is the present value of the all future revenues that can be generated out of the contract. There is a complex formula to calculate the NPV. Lesson 8 – Profit Dilution or Leakage Profit leakage is a loss of profits due to the difference between actual prices and prices on invoices. Businesses set target prices and figure their financial projections based on those prices. But due to increase in cost or some exceptional events like change in tax the actual cost may go up and thus reduce the profit. Lesson 9- Deferred Expenses The term "deferred expense" is used to describe a payment that has been made, but it won't be reported as an expense until a future accounting period. This method of accounting helps in making the current cash flow positive and reflects more profit for the current financial year but reduces the profit margin for future. Lesson 10- Credit Period The credit period is the number of days that a customer is allowed to wait before paying an invoice. The concept is important because it indicates the amount of working capital that a business is willing to invest in its accounts receivable in order to generate sales. Lesson 11-  Invoice and Invoice date An invoice is a commercial document that itemizes a transaction between a buyer and a seller. If goods or services were purchased on credit, the invoice usually specifies the terms of the deal, and provide information on the available methods of payment. An invoice is also known as a bill or sales invoice.   What is important here is that in a service contract the credit period counting can start from either "date of issue" of invoice or "date of receipt" of invoice as per the agreed terms. Lesson 12- Credit Rating Credit rating is an analysis of the credit risks associated with a financial instrument or a financial entity. It is a rating given to a particular entity based on the credentials and the extent to which the financial statements of the entity are sound, in terms of borrowing and lending that has been done in the past. Why is it important for a service contract? It is important since a service provider gives a credit to a customer in the sense that money is paid to the service provider after few days, usually a month (credit period).   Chapter 5 – Financial concepts used in Service Contracts -II Lesson 1- Internal Rate of Return (IRR) Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment. Lesson 2- First Financial Year Revenue (FFYR) First Financial Year Revenue is the total amount of revenue that will be generated in the current financial year. If the FFYR is more in percentage terms compared to the total revenue then it means that more money is getting realized in the project soon. Lesson 3- Cost of Living Adjustment (COLA). The cost of living adjustment is an increase in income that keeps up with the cost of living. It's often applied to wages, salaries and benefits. In long term service contracts running for more than say 5 years or so the COLA is applied to mitigate the inflation risk associated with the project. Lesson 4- Forex Risk Foreign exchange risk (also known as FX risk, exchange rate risk or currency risk) is a financial risk that exists when a financial transaction is denominated in a currency other than that of the base currency of the company.   When two or more currencies are involved in a service contract say the billing is done in USD and booking in some other local currency then in such cases there will be a risk associated with USD versus local currency rate.   Lesson 5- Pricing (Fixed and Variable) Pricing for a service contract has two denominations, fixed or variable. When it is fixed it means that for a contract the total amount to be paid by the customer for the services are already agreed and within that limit the agreed services or goods will be delivered. When it is variable it means that the total amount to be paid by the customer is dependent on what service or goods are consumed by the customer. In usual parlance, the variable pricing is also known as “Time and Material” pricing.   Lesson 6- Performance Bank Guarantee A performance bank guarantee provides a secure promise of compensation of a set amount in the event that a seller does not meet delivery terms or other provisions in the contract. The purpose of this sort of guarantee is to solidify the contractual connection between a seller and buyer. Lesson 7- Capex Capital expenditure or capital expense ("CAPEX") is an expense where the benefit continues over a long period, rather than being exhausted in a short period. Such expenditure is of a non-recurring nature and results in acquisition of permanent assets. It is thus distinct from a recurring expense. Lesson 8 – Opex An operating expense, operating expenditure, operational expense, operational expenditure (OPEX) is an ongoing cost for running a product, business, or system. Lesson 9- Service Credit Service credits (or service level credits) are a mechanism by which amounts are deducted from the amounts to be paid under the contract to the supplier if actual supplier performance fails to meet the performance standards set in the service levels Lesson 10– Earn back Earn backs are the received amounts from the already paid penalty or service credit, which is earned back by a service provider after delivering or maintaining the service level at more than expected levels.    

Introduction   It is a well-known fact that the combination of ownership and participative work force is a powerful competitive tool that works mostly in favour of the organizations. It can also be said with certainty that when ownership and participative employment are combined, substantial gains result. The possible way to achieve this is by granting of ESOPs and Sweat Equity.   ESOPs, “Employees Stock Ownership Plans” or "Employees Stock Options Plans" is the generic term for a set of instruments and incentive schemes provided to the employees of a company to motivate, reward, remunerate and to retain them. These are rather modern way of motivating employees as against the age-old method of compensating the employees with salaries alone. It is now an accepted practice for large entities to remunerate their employees, apart from salary, by the way of granting options to the employees to acquire the shares, hence a portion of the ownership, of the company for which they work. This is believed to motivate employees as they can closely relate their success with the success of the entity for which they work.   The employee stock option scheme (ESOS) concept was developed in the 1950s by lawyer and investment banker Louis Kelso, who argued that the capitalist system would be stronger if all workers, not just a few stockholders, could share in owning capital-producing assets. In today’s world, the human capital is unarguably one of the most important resources to run any enterprise. Companies use untraditional methods of remunerating employees to retain their employees and attract new employees to their organization. Therefore, scheme like ESOS, ESPS and sweat equity has gained popularity in recent times.   Sweat Equity   Sweat Equity Shares mean those shares which are issued by the company to its directors and/or employees at a discount or for consideration other than cash for providing know how or making available the rights in the nature of intellectual property rights or value additions. In other words, it refers to equity shares given to the company's employees on favourable terms, in recognition of their work. The issue of sweat equity allows the company to retain the employees by rewarding them for their services. Sweat equity rewards the beneficiaries by giving them incentives in lieu of their contribution towards the development of the company. Further, it enables greater employee stake and interest in the growth of an organization as it encourages the employees to contribute more towards the company in which they feel they have a stake. There are certain significant differences between ESOP and Sweat Equity, which are mentioned below;   Sweat Equity is grant of shares at discount or without monetary considerations whereas ESOP/ESOS is grant of option to purchase share at predetermined price given to employees,   Sweat Equity can be issued to the promoters of the Company whereas ESOS/ESOP cannot be issued to the promoters or promoter group, and   Minimum lock in period of 3 years for Sweat Equity whereas no such lock in period for ESOP and lock in period of 1 year for ESPS. Legal framework for Sweat Equity and Applicable Laws The government of India has time to time to enacted and published rules and laws governing the sweat equity schemes, issuance and regulations at large. The current opinion is based on the following provisions of law which are in vogue currently;   A1. Companies Act, 2013 Earlier the issue of sweat equity shares for a private company used to be regulated by Section 79A of Companies Act, 1956. Now the same is regulated by Section 54 and Chapter 4 under Companies Act, 2013.   As per the provision, “Sweat equity shares” means such equity shares, which 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.     Sec 54. Issue of Sweat Equity Shares   (1) Notwithstanding anything contained in section 53, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely: —   (a) the issue is authorised by a special resolution passed by the company; (b) the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued; (c) not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business; and] (d) where the equity shares of the company are listed on a recognised stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.   (2) The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank paripassu with other equity shareholders.      Comment: The COMPANY has to follow and comply with all the current provisions and regulation. To make it easier for COMPANY, the all the compliances are put in tabular format. This will make it easier for the reader to understand and comply with the regulations related to issuance of sweat equity.   Compliance table A   Sl No. Compliance to Rules & Regulations COMPANY Compliance (Yes/No/NA) Remarks 1 Special resolution passed by the Company (COMPANY) No To be passed 2 The resolution mentions number of shares, current market price, consideration, class of directors or employees. No To be passed 3 One year has passed since commencement of business No 4 Compliance with SEBI Not Applicable to COMPANY Not listed with Stock exchange A2. Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003 Sec 4. Special resolution  (1)   For the purpose of passing a special resolution under clause (a) of sub-section (1) of section 79A of the Companies Act, 1956 (1 of 1956), the explanatory statement to be annexed to the notice for the general meeting pursuant to section 173 of the said Act shall contain particulars as specified below. (i)    the date of the meeting at which the proposal for issue of sweat equity shares was approved by the Board of Directors of the company; (ii)   the reasons/justification for the issue; (iii) the number of shares, consideration for such shares and the class or classes of persons to whom such equity shares are to be issued; (iv) the value of the sweat equity shares along with valuation report/ basis of valuation and the price at the which the sweat equity shares will be issued; (v)  the names of persons to whom the equity will be issued and the person's relationship with the company; (vi)  ceiling on managerial remuneration, if any, which will be affected by issuance of such equity; (vii)  a statement to the effect that the company shall conform to the accounting policies specified by the Central Government; and  (viii)   diluted earning per share pursuant to the issue of securities to be calculated in accordance with the Accounting Standards specified by the Institute of Chartered Accountants of India.   (2)   Approval of shareholders by way of separate resolution in the general meeting shall be obtained by the company in case of grant of shares to identified employees and promoters, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversion) of the company at the time of grant of the sweat equity shares.   Sec 5. Register of shares The company shall maintain a Register of Sweat Equity Shares issued under section 79A in the Form specified in Schedule annexed to these rules.   Sec 6. Restriction on issue of sweat equity shares The company shall not issue sweat equity shares for more than 15% of total paid up equity share capital in a year or shares of the value of 5 crores of rupees, whichever is higher except with the prior approval of the Central Government.   Sec 7. Disclosure in the Directors' Report The Board of Directors, shall, inter alia, disclose either in the Directors' Report or in the annexure to the Director's Report, the following details of issue of sweat equity shares: - (a   Number of shares to be issued to the employees or the directors; (b)  conditions for issue of sweat equity shares; (c)  the pricing formula; (d)  the total number of shares arising as a result of issue of sweat equity shares; (e)  money realised or benefit accrued to the company from the issue of sweat equity shares; (f)  diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.     Sec 8.  Pricing of Sweat Equity Shares. - The price of sweat equity shares to be issued to employees and directors shall be at a fair price calculated by an independent valuer.   Sec 9.   Issue of Sweat Equity Shares for consideration other than cash. - Where a company proposes to issue sweat equity shares for consideration other than cash, it shall comply with following: (a)   The valuation of the intellectual property or of the know-how provided or other value addition to consideration at       which sweat equity capital is issued, shall be carried out by a valuer; (b)   the valuer shall consult such experts, as he may deem fit, having regard to the nature of the industry and the nature of the property or the value addition; (c)   the valuer shall submit a valuation report to the company giving justification for the valuation; (d)   a copy of the valuation report of the valuer shall be sent to the shareholders with the notice of the general meeting; (e)    the company shall give justification for issue of sweat equity shares for consideration other than cash, which shall form part of the notice sent for the general meeting; and (f)     the amount of Sweat Equity shares issued shall be treated as part of managerial remuneration for the purposes of sections 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.   Sec 10.  Lock-in of sweat equity shares. - Sweat equity shares issued to employees or directors shall be locked in for a period of three years from the date of allotment.   Sec 12.  Accounting policies. - (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. (2)   In respect of sweat equity shares issued during accounting period, the accounting value of sweat equity shares shall be treated as another form of compensation to the employee or the director in the financial statement of the company.    Comment: As per our understanding of the laws and current situation prevalent with COMPANY there are no problems with any of the regulations under the above laws. The querist has to ensure that while issuing the sweat equity all the following regulations (Table B) and procedures under the Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003, are followed and complied with.     Compliance Table B Sl No. Compliance to Rules & Regulations COMPANY Compliance (Yes/No) Remarks 1 Special Resolution containing the following; a. Date of meeting on sweat equity issue was approved by the Board of Directors No To be Complied b. The reason and justification for sweat equity issue No To be Complied c. Number of shares, consideration, and class of person No To be Complied d. Value of the equity with valuation report and the price No To be Complied e. Name of the person and relationship with Company No To be Complied f. Ceiling on managerial remuneration, if any, which will be affected by issuance No To be Complied g. Statement that COMPANY will conform to the accounting principles No To be Complied h. Diluted earnings per share pursuant to issuance No To be Complied 2 Approval of Shareholder by separate resolution in case the grant of shares equal or exceeds 1% of the issued capital of COMPANY at the time of grant. No/NA NA as it may not be applicable 3 Maintain a register as per Sec 79A No To be Complied 4 COMPANY will not issue more than 15% of total paid up equity or in a year or shares of the value of Rupees 5 crore whichever is higher. No To be Complied 5 Following disclosers in the Director’s report No To be Complied a. Number of shares to be issued No To be Complied b. Condition for issue of equity No To be Complied c. The pricing formula No To be Complied d. Total number of shares arising as a result of issue of sweat equity No To be Complied e. Money realized or benefit accrued to COMPANY from the issue of sweat equity No To be Complied f. Diluted Earnings Per Share pursuant to issuance of sweat equity No To be Complied 6 Pricing of sweat equity should be fair price calculated by independent valuer No To be Complied 7 Following to follow if consideration is other than cash; a. Valuation of intellectual property or of the know-how No To be Complied b. Valuer needs to submit the justification of the value No To be Complied c. A copy of valuation repost to be sent to the shareholders with notice for general meeting No To be Complied d. Justification for issue of sweat equity for consideration other than cash has to be sent with the notice for general meeting. No To be Complied e. The amount of sweat equity issued will form part of the managerial remuneration (under the provisions of Companies Act, 2013) if; i. Sweat equity shares are issue to Directors or Managers, and , ii. They are issued for non-cash consideration which does not form part of an asset shown in balance sheet.   No To be Complied 8 Sweat equity shares will be locked in for a period of three years from the date of allotment No To be Complied 9 Following to be complied for Accounting Policies; 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 No/NA To be confirmed b. Is above is not applicable then it will be expenses as per the accounting standards No/NA To be confirmed c. Accounting value of the sweat equity will be treated as another form of compensation to the employee or the director. No To be Complied       A3. Companies (Share Capital and Debentures) Rules, 2014.   Sec 8. Issue of sweat equity shares. - (1) A company other than a listed company, which is not required to comply with the Securities and Exchange Board of India Regulations on sweat equity, shall not issue sweat equity shares to its directors or employees at a discount or for consideration other than cash, for their providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called, unless the issue is authorised by a special resolution passed by the company in general meeting. Explanation. - For the purposes of this rule- (i) the expressions ‘‘Employee’’ means- (a) a permanent employee of the company who has been working in India or outside India, for at least last one year; or (b) a director of the company, whether a whole-time director or not; or (c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company; (ii) the expression ‘Value additions’ means actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights, by such person to whom sweat equity is being issued for which the consideration is not paid or included in the normal remuneration payable under the contract of employment, in the case of an employee.   (2) The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall contain the following particulars, namely: - (a) the date of the Board meeting at which the proposal for issue of sweat equity shares was approved; (b) the reasons or justification for the issue; (c) the class of shares under which sweat equity shares are intended to be issued; (d) the total number of shares to be issued as sweat equity; (e) the class or classes of directors or employees to whom such equity shares are to be issued; (f) the principal terms and conditions on which sweat equity shares are to be issued, including basis of valuation; (g) the time period of association of such person with the company; (h) the names of the directors or employees to whom the sweat equity shares will be issued and their relationship with the promoter or/and Key Managerial Personnel; (i) the price at which the sweat equity shares are proposed to be issued; (j) the consideration including consideration other than cash, if any to be received for the sweat equity; (k) the ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity and how it is proposed to be dealt with; (l) a statement to the effect that the company shall conform to the applicable accounting standards; and (m) diluted Earning Per Share pursuant to the issue of sweat equity shares , calculated in accordance with the applicable accounting standards.   (3) The special resolution authorising the issue of sweat equity shares shall be valid for making the allotment within a period of not more than twelve months from the date of passing of the special resolution.   (4) The company shall not issue sweat equity shares for more than fifteen percent of the existing paid up equity share capital in a year or shares of the issue value of rupees five crores, whichever is higher: Provided that the issuance of sweat equity shares in the Company shall not exceed twenty five percent, of the paid-up equity capital of the Company at any time.   (5) The sweat equity shares issued to directors or employees shall be locked in/non transferable for a period of three years from the date of allotment and the fact that the share certificates are under lock-in and the period of expiry of lock in shall be stamped in bold or mentioned in any other prominent manner on the share certificate.   (6) The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as the fair price giving justification for such valuation.   (7) The valuation of intellectual property rights or of know how or value additions for which sweat equity shares are to be issued, shall be carried out by a registered valuer, who shall provide a proper report addressed to the Board of directors with justification for such valuation.   (8) A copy of gist along with critical elements of the valuation report obtained under clause (6) and clause (7) shall be sent to the shareholders with the notice of the general meeting.   (9) Where sweat equity shares are issued for a non-cash consideration on the basis of a valuation report in respect thereof obtained from the registered valuer, 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 accounting standards; or (b) where clause (a) is not applicable, it shall be expensed as provided in the accounting standards.   (10) The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purposes of sections 197 and 198 of the Act, if the following conditions are fulfilled, namely. - (a) the sweat equity shares are issued to any director or manager; and (b) they are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards.   (11) In respect of sweat equity shares issued during an accounting period, the accounting value of sweat equity shares shall be treated as a form of compensation to the employee or the director in the financial statements of the company, if the sweat equity shares are not issued pursuant to acquisition of an asset.   (12) If the shares are issued pursuant to acquisition of an asset, the value of the asset, as determined by the valuation report, shall be carried in the balance sheet as per the Accounting Standards and such amount of the accounting value of the sweat equity shares that is in excess of the value of the asset acquired, as per the valuation report, shall be treated as a form of compensation to the employee or the director in the financial statements of the company. Explanation.- For the purposes of this sub-rule, it is hereby clarified that the Accounting value shall be the fair value of the sweat equity shares as determined by a registered valuer under sub-rule (6)   (13) The Board of Directors shall, inter alia, disclose in the Directors’ Report for the year in which such shares are issued, the following details of issue of sweat equity shares namely:- (a) the class of director or employee to whom sweat equity shares were issued; (b) the class of shares issued as Sweat Equity Shares; (c) the number of sweat equity shares issued to the directors, key managerial personnel or other employees showing separately the number of such shares issued to them, if any, for consideration other than cash and the individual names of allottees holding one percent or more of the issued share capital; (d) the reasons or justification for the issue; (e) the principal terms and conditions for issue of sweat equity shares, including pricing formula; (f) the total number of shares arising as a result of issue of sweat equity shares; (g) the percentage of the sweat equity shares of the total post issued and paid up share capital; (h) the consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares; (i) the diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.   (14)        (a) The company shall maintain a Register of Sweat Equity Shares in Form No. SH.3 and shall forthwith enter therein                   the   particulars of Sweat Equity Shares issued under section 54. (b) The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide. (c) The entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.    Comment: Companies (Share Capital and Debentures) Rules, 2014 reiterates the provisions of the Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003. This is to reemphasize the legal provisions of related to issuance of sweat equity. Most of the regulations are repeated to bring in the scrutinizing effect of the law while a company is proposing to issue sweat equity. Section 8 of the Companies (Share Capital and Debentures) Rules, 2014 elaborates on certain additional points which are produced in he below compliance table C. There are certain additional provisions in the Companies(Share Capital and Debentures) Rules, 2014, which are highlighted and underlined in the above sections. COMPANY has to ensure that they comply with all the provisions as mentioned in the below table C.   Compliance Table C Sl No. Compliance to Rules & Regulations COMPANY Compliance (Yes/No) Remarks 1 The notice for general meeting should contain the principal terms and conditions on which sweat equity shares are to be issued, including basis of valuation No To be Complied 2 The notice for general meeting should contain the time period of association of such person with the company No To be Complied 3 The issuance of sweat equity shares in the Company shall not exceed twenty five percent, of the paid-up equity capital of the Company at any time No To be Complied 4 The company shall maintain a Register of Sweat Equity Shares in Form No. SH.3 No To be done post issuance 5 The entries in the register shall be authenticated by the Company Secretary of the company No To be done post issuance     Tax Implications for sweat equity allotment. B1. Income Tax Act, 1961 Sec 17(2)(vi) of Income-tax Act, 1961 For the purposes of sections 15 and 16 and of this section, — (2)"perquisite" 11a includes— [(vi)the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost   or at concessional rate to the assessee. Explanation. —For the purposes of this sub-clause, — (a)"specified   security"   means   the   securities   as   defined   in   clause (h) of section 25 of the Securities Contracts (Regulation) Act, 1956   42   of 1956) and, where employees' stock option has been granted under any plan or scheme therefor, includes the securities offered under such plan or scheme; (b) "sweat equity shares" means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for   providing know-how   or   making available   rights   in   the   nature   of intellectual property rights or value additions, by whatever name called; (c) the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case   may   be, on   the   date   on   which   the   option   is   exercised   by   the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares; (d)"fair market value” means the value determined in accordance with the method as may be prescribed; (e) "option” means a right but not an obligation granted to an employee to apply   for   the   specified   security   or   sweat   equity   shares   at   a predetermined price;    Comment: If above conditions are satisfied, perquisite will be taxable in the hands of employees in the assessment year relevant to previous year in which shares or securities are allotted or transferred to the employee. The valuation for Securities needs to be done on Fair Market Value of securities at the date of exercise of option by the employee. B2. Valuation of specified securities or sweat equity shares QUOTED SHARES; If the shares of the company are listed on any Stock Exchange, then the Fair Market Value will be average of opening price and closing price of the share on that date. If shares of the company are listed on more than one Stock Exchanges, then the Fair Market Value will be average of Opening Price and Closing Price of shares on that Stock Exchange on which records highest volume of trading of shares of the Company. Where at the date of exercise of option, there is no trading of shares on any Stock Exchange, then the Fair Market Value will be the closing price of the shares on any Stock Exchange on a date closest to the date of exercise of option and immediately preceding such date. UNQUOTED SHARES; if the shares of Company is not listed on any Stock Exchange then the Fair Market Value of Shares will be as determined by the Merchant Bankers on the Specified Date.   “Specified Date”; means the date of exercise of the option, or any date earlier the date of exercise of the option, not being a date, which is more than 180 days earlier than the date of exercise of the option. Sweat Equity shares as per the Income Tax Act, 1961 has 2 aspects. -Salaries. -Capital Gains. Salaries: Whenever an employee receives a sweat equity shares, the value of such shares will be taxable as a perquisite under the head Salaries as per section 17 of Income Tax Act, 1961. The value of taxable perquisite in case of shares allotted to the employee is equal to the fair market value (FMV) of the shares as on the date of which the option is exercised as reduced by the amount actually paid or recovered from each employee. It may be noted that FMV as on the date of exercise of the option is relevant. FMV shall be the average of opening price and closing price of the share on the recognized stock exchange which records the higher volume of trading in the share. Capital Gains: Whenever the Sweat Equity Shares are transferred it is subject to Capital Gains Tax. In this regard, the aspects to be noted are “Period of Holding” & “Cost of Acquisition”. Period of Holding: It shall be reckoned from the date of allotment or transfer of such equity shares. Cost of Acquisition: It shall be the FMV value as computed for the determining the perquisite as mentioned above (Salaries). Points to be noted: If such shares are transferred within a period of 12 months from the date of allotment, then such gains will be treated as Short term Capital Gains If such shares are transferred after holding for a period of 12 months then such gains will be treated as Long term Capital Gains (LTCG).(However the Equity Shares are listed and chargeable to securities transaction tax, it is exempt from LTCG.)     B3. Stamp Duty Applicable As per Section 3 of Indian Stamps Act 1899, Every Share Certificate must bear the necessary stamp duty as per the Stamp Act of the respective State/ Union Territory from which Certificate is issued. The rates of stamp duty can be obtained with reference to relevant article of given State Act. For this transaction where the sweat equities are getting allotted and subsequently transferred, The West Bengal Stamp Rules, 1994 will be applicable and relevant stamp duty will have to be paid as per this rule.     The rate for application of stamp duty is as follow; Sl No. No. and Name of Article Rate of Stamp Duty 1 23 Conveyance 23A Conveyance, in respect of amalgamation, merger, reconstruction, or demerger, of companies, other than amalgamation, merger, reconstruction or demerger, of two banking companies or a banking company with a non-banking financial company, executed on the basis of decree or final order of any Civil Court or every order made by the Tribunal under section 394 of the Companies Act, 1956, as defined by section 2(10), not being a transfer charged or exempted under No. 62, on the market value of the property which is the subject¬ matter of the conveyance, when the property of the transferor company located in the State of West Bengal is transferred to the transferee company by way of such amalgamation, merger, reconstruction, or demerger or companies under the decree of final order of any Civil Court or every order of the Tribunal under section 394 of the Companies Act, 1956: Provided that on and after the constitution of the National Company Law Tribunal, the expression ’High Court’ shall be read as ’Tribunal’. 5% on market value in Panchayet Area 6% on market value in Municipal Areas, Corporation Areas and notified area other than those included in 23(a) and specified mouzas or blocks of South 24 Parganas and North 24 Parganas which are distributed over three action areas of New Town Kolkata Development Authority and divided into a number of blocks. 1% Additional Stamp Duty in both urban and rural areas, if the market value exceeds 40 lakh w.e.f. 02.03.2015. The same duty as a Conveyance (No. 23) on the aggregate of the market value of the shares issued or allotted, in exchange or otherwise, and the amount of consideration paid- (a) by the transferee company, for such amalgamation or merger: Provided that the amount of such duty chargeable under this article shall not exceed: (i) an amount equal to two per centum of the true market value of the immovable property located within the State of West Bengal of the transferor company, or (ii) an amount equal to half per centum of the aggregate of the market value of the shares issued or allotted, in exchange or otherwise, and the amount of consideration paid by such transferor company, for such amalgamation, whichever is higher;    Comment: Applicable stamp duty will be 7% of the total allotted share value and is to be paid by the transferee meaning, the employee/director to whom the shares are allotted.       Legal Procedure for issue of sweat equity The allotment and issue of sweat equity when done under the purview of the applicable laws and regulations must be followed by the procedure as laid down in different statutes. All the procedures are to be followed in word and spirit. Following (Table D) are the list of procedures that COMPANY must follow in order to ensure that issuance of Sweat Equities is as per the applicable rules, laws and regulations prevalent in the country.  The Issuing company can take the help of a Company Secretary to get all the following compliances complied with. Compliance Table D Sl No. Compliance to Rules & Regulations COMPANY Compliance (Yes/No) Remarks 1 Check the eligibility for issue of sweat equity shares based on the conditions stipulated above and obtain valuation report from a registered valuer. No To be Complied 2 Issue notice in accordance with the provisions of section 173(3) of the Companies Act, 2013 (not less than 7 days in writing) for convening a meeting of the Board of Directors. No To be Complied 3 Hold and convene Board Meeting for the following purpose: a. To decide the terms of issue. No To be Complied b. To fix date, time and venue for holding Extra-Ordinary General Meeting (EGM) to pass special resolution for approval of issue of sweat equity shares. No To be Complied c. To approve notice of EGM. No To be Complied d. To authorize any Director or Secretary to issue notice of EGM. No To be Complied 4 The explanatory statement should contain the following mandatory details. a. the date of the Board meeting at which the proposal for issue of sweat equity shares was approved; No To be Complied b. the reasons/justification for the issue; No To be Complied c. the class of shares under which sweat equity shares are intended to be issued; No To be Complied d. the total number of shares to be issued as sweat equity; No To be Complied f. the class or classes of directors or employees to whom such equity shares are to be issued; No To be Complied g. Principal terms and conditions on which sweat equity shares are to be issued, including basis of valuation; No To be Complied h. Time period of association of such person with the company; No To be Complied i. the names of the directors or employees to whom the sweat equity shares will be issued and their relationship with the promoter or/and Key Managerial Personnel; No To be Complied j. the price at which the sweat equity shares are proposed to be issued; No To be Complied k. the consideration including consideration other than cash, if any to be received for the sweat equity; No To be Complied l. would the ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity and how is it proposed to be dealt with; No To be Complied m. a statement to the effect that the company shall conform to the applicable accounting standards; and No To be Complied n. diluted Earnings Per Share pursuant to the issue of sweat equity securities, calculated in accordance with the applicable accounting standards. No To be Complied 5 Issue notice of not less than twenty-one (21) clear days for convening General Meeting to every member of the company, Directors and auditor. No To be Complied 6 In case of listed company, send three copies of the notice to the STOCK EXCHANGES on which the securities of the company are listed. No To be Complied 7 Hold General Meeting and pass the special resolution No To be Complied 8 E-form Filing: File Form MGT-14 with Registrar of Companies within 30 days of the General Meeting with the following attachment: No To be Complied a. Notice calling the EGM. No To be Complied b. Certified true Copy of the Special resolution approving issue of Sweat Equity Shares. No To be Complied 9 In case of listed company, send copy of the proceedings of the general meeting to the stock exchange with which the company is listed. No To be Complied 10 Issue notice in accordance with the provisions of section 173(3) of the Companies Act, 2013, (not less than 7 days in writing) for convening a meeting of the Board of Directors. No To be Complied 11 Hold and convene Board Meeting within 12 months and make allotment of sweat equity shares. No To be Complied 12 E-form Filing: File return of allotment in Form PAS-3 within 30 days of Board Meeting with the following attachment: a. List of allottees, separate list for each allotment   No To be Complied b. Copy of Board resolution approving allotment of shares   No To be Complied c. Valuation Report from the registered valuer is mandatory in case obtained from valuer. No To be Complied 13 Pay Stamp duty on Issue Shares as per the relevant State Stamp Act. No To be Complied 14 Issue Share Certificates to the allottees. No To be Complied 15 Make entry in Register of Sweat Equity Shares maintained in Form No. SH.3 No To be Complied 16 Make following disclosure in Boards’ Report of the year in which sweat equity issue is made: a. Class of director/ employee to whom sweat equity shares were issued; No To be Complied b. Class of shares issued as Sweat Equity Shares; No To be Complied c. Number of sweat equity shares issued to the directors, their relatives, key managerial personnel or other employees showing separately the number of such shares issued to them , if any, for consideration other than cash and the individual names of allottees holding 1% or more of the issued share capital ; No To be Complied d. The reasons/justification for the issue; No To be Complied e. Principal terms and conditions for issue of sweat equity shares, including pricing formula; No To be Complied f. The total number of shares arising as a result of issue of sweat equity shares; No To be Complied g. Percentage of the sweat equity shares of the total post issued and paid up share capital; No To be Complied h. Consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares; No To be Complied i. Diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares. No To be Complied