Friday, July 29, 2016

Relaxation to Start-ups for ESOPs & Sweet Equity Shares

The government has provided benefit to start ups under Companies Act by relaxing the norm to issue sweet equity shares and shares under ESOPs. This has been done by the latest Companies (Share Capital and Debentures) Third Amendment Rules, 2016 (Amendment Rules) , amending the Rule 8 that govern sweet equity shares issuance and Rule 12 of Rules 2014  that pertains to issue of shares under ESOP. Let us analyze the changes one by one .

Change in Sweet Equity Share Issue by Startups

Rule 8(4) of Rules, 2014 that restricts companies from issuing sweat equity shares in excess of 25% of the paid up capital at any time and also limits the issuance of sweat equity shares per year to 15% of the paid up capital or issue value of Rs.5 crores whichever is higher.
The amendment expressly allows notified Start-ups to issue sweat equity shares not exceeding 50% of its paid up capital up to 5 years from the date of its incorporation or registration.However, the yearly limits of 15% of paid up capital or Rs.5 crores whichever is higher has to be complied with.

Change in Rule 12 related to ESOPs

The Startups are now allowed to issue the shares under ESOP to employees or directors who are holding more than 10% of shares or belogs to promoter group. The relaxation is provided by exempting the startups from application of Clause (1) and (ii) under Explanation c of  Section 62 (1)(b) of Act, 2013  that defines the term 'Employee' as mentioned in Section 62(1)(b) :
For the purposes of clause (b) of sub-section (1) of section 62 and this rule ''Employee'' means-
(a) a permanent employee of the company who has been working in India or outside India; or
(b) a director of the company, whether a whole time director or not but excluding an independent director; or
(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company but does not include-
i. an employee who is a promoter or a person belonging to the promoter group; or
ii. a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.

Now the notified Start-ups are exempted from application of sub-Clause (1) and (ii)  upto 5 years from the date of incorporation or registration.

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