Understanding the Concept of Start Up and Sweat Equity Shares

Government of India launched the initiative of Startup India in year 2016. The ultimate aim of this initiative was to give boost to young and innovative entrepreneurs to come forward and start their business. The government had launched this flagship mission under Department for Promotion of Industry and Internal Trade (DPIIT). Today in this article, we will understand the concept of startups. Also we will see how sweat equity shares help these startups to retain good talent in the company.

Meaning of Startup

DPIIT (Department of Promotion of Industry and Internal Trade) is responsible for extending benefits of all government schemes and incentives to the startups. An entity should fulfil certain criteria for DPIIT recognition. Let us see what the criteria-are

 Age of the Company

• A Company should be operating or in existence for less than 10 years from year of incorporation

Type of Entity

• Private Limited Company
• Registered Partnership Firm
• Limited Liability Partnership

Annual Turnover

• Annual Turnover of the company should not exceed Rs.100 crores in any of the Financial Year from its incorporation.

Original Entity

• The entity should not be formed by splitting up or reconstructing an already existing business.

Innovative and Scalable

• It should work towards development or improvement of a product, process or service.
• It should have scalable business model with high potential for creation of wealth and employment.

Above are the criteria for being a start-up. The startup starts at the stage of incorporation. Following is the process to get DPIIT recognition:-

Process for Getting DPIIT Recognition

The process for getting DPIIT Recognition is-

• A company should go to portal startupindia.gov.in
• Then a company has to go and click on Get Recognised Tab
• The company should then fill in basic details like Entity details, Full Address, Authorised Representative Details, Details of Directors and Partners.
• Thereafter the company needs to provide details like Patent/Trademark Details. PAN, CIN, Firm Registration Number.
• Company should after that provide details of startup activities and self-declaration.
• Any wrong information provided can attract a penalty of Rs.25,000/- which can go up to 50% of minimum paid up capital.
• A certificate of recognition is issued to the company by DPIIT.

Why Recognition under DPIIT is beneficial?

Any entity recognised by DPIIT has following benefits-

• Regulatory burden on the start-ups will reduce and also the compliance costs.
• Self-Certification will be allowed for the start-ups under various laws.
• The entities will be eligible for tax holiday for 3 years out of any first 10 years of its incorporation under Sec.80-IAC.
• Exemption under Sec.56(2)(viib) of Income Tax Act will also be available for-
• Startup with aggregate amount of share capital and share premium does not exceed 25 crore rupees
• Is DPIIT recognised
• Government is planning to set-up various Research Parks facilities for the start ups.
• It makes operations of the startup very easy as the credibility of the organisation increases.

Now, to establish a good business, any business needs technical know-how and expertise. However, getting such knowledgeable and expert people is not an easy task for start-ups. So, to gain confidence of these human resources shares of the company are given to them. These shares are sweat-equity shares. Now, let us understand the meaning of sweat- equity shares.

Meaning of Sweat Equity Shares

Sweat Equity shares means the equity shares that are given by a company to its directors or employees at a discount or for consideration, other than cash. These shares are provided in exchange of their know-how and expertise. Now, the question is whether a startup can issue sweat equity shares or not?

Relation between Startup and Sweat Equity Shares

Well the answer to above question is YES. The start-ups can issue sweat equity shares. The time limit is changed as per amendment notification by MCA dtd 05.06.2020. Start-ups can issue sweat equity shares at any time from first 10 years of its incorporation

The benefits of this amendment are:-

• Normally the lock-in period for sweat equity shares is 3 years. Therefore, after 3 years KMPs or directors holding sweat equity shares can encash their shares and move on.
• However, now as the time limit is 10 years, company can issue the sweat equity shares again to its employees and can get their services.
• It will specially benefit the industries where the technology keeps on changing rapidly. As they will have something to offer to their new entrants or retain the old employees.

Now we will understand the legal requirements for issuing sweat equity shares.

Legal provisions regarding Sweat Equity Shares

A company needs to follow below procedures to issue sweat equity shares-

• Special Resolution is a must for issuing sweat equity shares .
• For passing the special resolution, a company should issue a notice to call the shareholder’s meeting.
• The resolution must have all the details like current market price of the shares, and what is the issue price of shares and number of shares issued. Company has to file MGT-14 with ROC.
• After passing the resolution, the company should again call a Board meeting for allotment of shares. PAS-3 should be filed with Registrar.
• The company should maintain a register for sweat equity shares. The register should be maintained in SH-3.

Regulations on a Listed Startup while issuing Sweat Equity Shares

SEBI regulates the operations of a listed company. So, there are some additional guidelines for listed entities while issuing sweat equity shares. The guidelines include:-

• Employee- The meaning of employee for this purpose means,
  • Any employee whether working in India or Abroad.
  • A director, whether whole time director or not.

• Limit on issue of Shares- The quantum of sweat equity shares that can be issued are-
  • The amount of sweat equity shares cannot be more than 15% of existing paid up equity share capital in a year.
  • Issuance of sweat equity shares cannot exceed the 25% of paid up equity share capital of a company at any time.
  • For start-ups that are listed under Innovators Growth Platform above limits are relaxed . These companies can issue more than 15% but the overall limit of 50% of paid up equity share capital cannot be exceeded. Such issue can be made up to 10 years of incorporation.

• Resolution- The Company needs to pass a special resolution for issue sweat equity shares. The issue should take place within 12 months of the resolution.
• Valuation- A merchant banker should do the valuation. The merchant banker can obtain a certificate from an independent chartered accountant that valuation is as per accounting standards. He can also consult experts and valuers in this regard.

Conclusion

The order of government to allow sweat equity shares by a startup has given a new push to these startups. As the sweat equity shares help the allottees to perform their duties better. The more the growth of business, more will be the market value of their shares. It is a win-win situation for both the employee and the company. So this is how, sweat equity shares help the startups to grow their business. As they enable a company to get best technical know-how and expertise in the market.