Regulatory Alert: Amendment to Sweat Equity Issue by Start-ups and Debenture Rules
15 June 2020
The Ministry of Corporate Affairs (MCA) on 5 June 2020 has notified the Companies (Share Capital and Debentures) Amendment Rules, 2020 (the amended Rules) by further amending Companies (Share Capital and Debentures) Rules, 2014 (the existing rules). The notification broadly pertains to two major relaxations provided to the companies in relation to;
- Issue of Sweat Equity Shares by start-up companies, and
- Investment or deposit of sum in respect of Debentures maturing during the year
The key highlights of the notification are summarised below
Issue of Sweat Equity Shares by Start-Ups
- Earlier start-up companies were allowed to issue sweat equity shares upto 50% of their paid equity share capital upto 5 years from the date of their incorporation. Post, the amendment start-up companies can now issue sweat equity shares up to 10 years from the date of their incorporation within the overall limit of 50% of paid up equity share capital.
- Also, earlier, for the definition of “start-up”, the rules used to refer to an older notification issued by the Department of Industrial Policy and Promotion – issued on 17 February 2016. The amended rules refer to the definition of “start-up” to a subsequent notification, i.e. “G.S.R. 127(E) dated the 19 February 2019 issued by the Department for Promotion of Industry and Internal Trade”. A comparative analysis of the definition of start-up has been done below for your reference:
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Particulars
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As per notification dated
17 February 2016 (Erstwhile)
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As per notification dated
19 February 2019 (Current)
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Tenure
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Entity shall be considered as a start-up upto 5 years from the date of incorporation
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Entity shall be considered as a start-up upto 10 years from the date of incorporation
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Turnover
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Turnover for any of the financial years since incorporation has not exceeded INR 25 crores
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Turnover for any of the financial years since incorporation has not exceeded INR 100 crores
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Areas of Operation
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It is working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property
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It is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation
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Relaxation from maintaining of Debenture Redemption Fund for issue of privately placed debentures
- According to the existing rule, the following class of companies, issuing public and privately placed debentures, are required to invest or deposit, on or before 30 April each year, at least 15% of the amount of its debentures maturing during the year ending on 31 March of the next year, in the prescribed manner.
- Listed Non-Banking Financial Companies (NBFCs) registered with Reserve Bank of India (RBI) under section 45- IA of the RBI Act, 1934;
- Listed Housing Finance Companies (HFCs) registered with National Housing Bank;
- All other listed companies (other than All India Financial Institutions (AIFIs) and banking companies)
- All unlisted companies (other than NBFCs, HFCs, AIFIs and banking companies)
- As per the amended rules, certain class of companies, issuing privately placed debentures are now exempted from investing /depositing the sum of 15% of amount of its debentures maturing during the year ending on 31st March of the next year in the manner specified.
- Listed NBFCs registered with RBI under section 45- IA of the RBI Act, 1934;
- Listed HFCs registered with National Housing Bank;
- All other listed companies
- Thus, the revised scenario with respect to requirement of investing /depositing sum of 15% of amount of company’s debentures maturing during the year ending on 31 March of the next year is summarised as under:
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Sr. No.
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Particular
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Applicability of requirement w.r.t. investing or depositing 15%
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1.
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All India Financial Institutions
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Not Applicable
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2.
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Banking Companies
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Not Applicable
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3.
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Listed NBFCs and HFCs (Public issue)
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Applicable
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4.
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Listed NBFCs and HFCs (Privately placed)
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Not Applicable
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5.
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Other listed companies (Public issue)
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Applicable
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6.
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Other listed companies (Privately placed)
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Not Applicable
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7.
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Unlisted NBFCs and HFCs
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Not Applicable
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8.
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Other unlisted companies
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Applicable
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BDO Comments
In case of start-ups, sweat equity could be one of the tools to retain key employees contributing to intellectual property and considering that start-ups being low on funds in the current times, this move of the MCA allowing them to issue sweat equity for up to 10 years instead of 5 years from the date of incorporation would enable them further to explore sweat equity route for deserving employees over a long gestation period.
This additional period of 5 years provided to start-up companies for the issue of sweat equity shares coupled with the tax amendment proposed in the recent budget whereby the tax payment on the benefit received by employees/ directors on issue of sweat equity shares is differed, reinstates the Government’s focus to create a conducive environment for startups, by providing multiple layers of incentives.
Further, the exemption to certain class of companies from investing or depositing 15% of amount of its debentures maturing during the year is a significant relaxation for many listed companies, as this improves their liquidity position during the current situation.