The Ministry of Corporate Affairs (MCA) has amended the Companies (Share Capital and Debentures) Rules, 2014, to allow startups to issue sweat equity shares not exceeding 50% of its paid-up capital upto a period of 10 years from the date of registration.
What is a sweat equity?
It is part of the Share Capital of the Company which is 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.
The companies take this route to overcome the initial cashflow challenges.
What is a startup?
An entity is considered as a startup if it meets the following criteria:
| Entity |
|
| Tenure | Upto 10 years from the date of incorporation / registration |
| Annual Turnover | Less than Rs. 100 crore for any of the financial years since its Incorporation |
| New entity | The entity should be new one and should not have been formed by splitting up or reconstructing an already existing business |
| Nature of work | work towards innovation, development or improvement of products/process/services and/or have scalable business model with high potential of employment generation or wealth creation |
How this new relaxation help?
Given the business situation due to pandemic and shortage / preservation of funds, this form of compensation shall be well received by the entrepreneurs. Any Company which is five or more years and less than 10 years of existence can issue sweat equity to its employees to retain them.
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