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CS Executive · Capital Market and Securities Laws · Share Based Employee Benefits and Sweat Equity

Meghdoot Technologies Ltd, an unlisted company, proposes to issue sweat equity shares to its key engineers. Under the Companies Act, 2013 (Section 54), which of the following is a condition for such an issue?

A company issuing sweat equity shares must have the issue authorised by a special resolution. Section 54 requires this shareholder approval, and the shares must be of a class already issued. Board approval alone is insufficient, and the shares rank equally with other equity shares.

  1. AThe issue must be authorised by a special resolution passed by the companyCorrect
  2. BThe issue must be approved only by a simple majority of the Board
  3. CThe shares must belong to a new class not yet issued by the company
  4. DThe shares must carry limited voting rights compared with other equity shares

Explanation

Section 54(1)(a) requires that the issue of sweat equity shares be authorised by a special resolution. A Board-only approval is not enough. The shares must be of a class already issued, so a new class is not permitted, and they rank pari passu with other equity shares, so limited voting rights are not applicable.

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