Start-up companies given more leeway to issue sweat equity shares

With valuations of several start-ups taking a hit during the lockdown, the Centre has sought to soften the blow by allowing them to issue sweat equity within 10 years of their incorporation.

This would come as a relief for start-ups as earlier the maximum time limit prescribed under the rules for them to issue up to 50 percent of their paid-up capital as ‘sweat equity’ was five years after incorporation or registration.

This move by the Ministry of Corporate Affairs is expected to help start-ups attract and retain key talent, say corporate observers and experts. Sweat equity is usually issued by start-ups to their directors or employees for the know-how or intellectual property (nonfinancial investments of time and effort) provided by them. They can be issued for considerations other than cash or even at a discount.

Srinath Sridharan, Senior Industry Advisor, told BusinessLine: “Since the current economic slowdown due to Covid-19 might have pushed start-up valuations back by up to few years, this additional 5-year window could improve their potential to attract newer critical talent and/or retain existing talent by offering them sweat equity”.

For those employees who already hold sweat equity or ESOPs, this additional window could see their potential wealth creation plan improve with the issuance of additional sweat equity, he said.

Welcome move

Vaibhav Kakkar, the Partner, L&L Partners, a law firm, said this is a welcome liberalization from the perspective of start-up companies. “This provides a longer runway for start-ups to crystallize their shareholding structures and would allow them to substantially incentivize and retain key personnel in the long run,” Kakkar said.

Ankit Singhi, a Partner at Corporate Professionals, said the increase in the period of allotment will definitely help a start-up to attract talent.

The MCA has now amended rules to specify that a listed company, which has privately placed its debentures, will not be required to invest or deposit, as the case may be, a sum not less than 15 percent of the number of its debentures maturing during the year ending March 31 of the next year or before April 30 of each year.

“Relaxation to listed companies from investing a certain percentage of maturing deposits will certainly lead to the availability of funds and easing of liquidity position,” Singhi said.

Published in The Hindu Business Line on June 9 | Source: https://bit.ly/30sitMx

Click here for a blog on the difference between sweat equity shares & ESOPs.
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