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

Nilgiri Ltd has already issued only one class of equity shares. Its Board wants to issue sweat equity shares of a completely new class that the company has never issued. Which view is correct under Section 54(1)?

It is not permitted. Section 54(1) allows sweat equity shares only of a class of shares already issued by the company. A new, previously unissued class cannot be issued as sweat equity, regardless of Board approval, pricing or any Registrar approval.

  1. APermitted, if the Board passes a resolution by majority
  2. BPermitted, if the shares are issued at a discount to market price
  3. CNot permitted, because sweat equity shares may be issued only of a class of shares already issuedCorrect
  4. DPermitted, if the Registrar of Companies approves

Explanation

Section 54(1) allows a company to issue sweat equity shares of a class of shares already issued, subject to the stated conditions. A new class therefore cannot be issued as sweat equity, and neither a Board resolution, a discount nor Registrar approval changes this.

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