RSV Private Limited., incorporated five years ago, passed a special resolution during its Annual General Meeting (AGM) held on 30th September, 2024, to issue 10 lakh sweat equity shares at a discount to a class of direct

(i) Section 54(1) of Companies Act 2013 provides that notwithstanding anything contained in Section 53, of Companies Act 2013 a company can issue sweat equity shares, of a class of shares already issued, if the following conditions, are satisfied: Authorisation by Special Resolution: The issue has been authorized by a special resolution passed by the company in the general meeting. 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. Limitations on issue of sweat equity shares: Rule 8(4) of the Companies (Share Capital and Debenture) Rules 2014 states that, 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. 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. Three Years Locking Period: Rule 8(5) of the Companies (Share Capital and Debenture) Rules 2014-The sweat equity shares issued to directors or employees shall be locked 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. The sweat equity shares may be issued at a discount. It has been correctly authorised by passing a special resolution. The size of issue of shares should not exceed 7,50,000 shares (15%*50 lakh shares). However, the company has issued 10,00,000 sweat equity shares which is in excess of the prescribed limit of 15% in any year though it is within the limit of 25% of total shares at any time. The lock-in period should be 3 years but the company has fixed it for 5 years. Considering this the company has violated the conditions regarding size and lock-in period of the issue of sweat equity shares. However, the value of proposed 10 lakh sweat equity shares @ ₹10 per share i.e. ₹1 crore does not exceed ₹5,00,00,000, the company can issue 10 lakh sweat equity shares, not exceeding the overall limit of 25% of paid-up equity share capital at any time. (ii) If the company is a Start-up company: As per proviso to Rule 8(4) of the Companies (Share Capital and Debenture) Rules 2014 -A startup company, as defined by Ministry of Commerce and Industry, Government of India, may issue sweat equity shares not exceeding fifty percent of its paid up capital up-to ten years from the date of its incorporation or registration. The company was incorporated 5 years ago and not crossed the time limit of 10 years from its incorporation. The issue size of 10 lakh equity shares would be within the limit of 50% of the total paid-up shares (50%*50 lakh=25 lakh) but the lock-in-period of 5 years will be a violation of condition of section 54. Hence, for this reason, the issue of sweat equity shares shall be invalid.