Apart from disclosure about the relationship, this is only a repetition of the aforementioned point three;

One wonders why the DCA thought it fit to make unlisted companies follow the accounting policies specified by the Central Government and in the same breadth follow the Accounting Standard on Earnings Per Share issued by the ICAI.

With so much regulation doing the rounds, in case of contrary views by these two bodies, unlisted companies could be made to sweat.

The rules go on to say that in case of grant of shares to identified employees and promoters in excess of 1 per cent of the issued capital, a special resolution in the general meeting is sine qua non.

Companies have been mandated to maintain a register of sweat equity shares in a pre-prescribed format and also that they shall not issue sweat equity shares for more than 15 per cent of total paid-up capital or shares of the value of Rs 5 crore, whichever is higher.

Intentions to breach this limit must be with the prior approval of the Central Government.

The Directors Report, which these days is almost the Corporate Governance report, needs to disclose:

This would basically be an edit, copy and paste operation from the explanatory statement issued under Section 173 of the Companies Act.

The pricing of the sweat equity shares shall be at a fair price calculated by an independent valuer.

The definition section, normally dormant in Rules, breaks the jinx this time by defining " share price" to mean price of a share on a given date arrived at on the net worth basis. Hence, the valuer has something to start with.

In case companies contemplate issue of sweat equity for consideration other than cash, they would have to comply with:

The valuation of the intellectual property or of the know-how provided or other value addition to consideration at which sweat equity capital is issued is to be done by a valuer is free to seek outside assistance for such valuation before giving a valuation report.

A copy of the valuation report shall be sent to the shareholders with the notice of the general meeting;

The company is to give justification for issue of sweat equity shares for consideration other than cash;

The amount of sweat equity shares shall be treated as part of managerial remuneration for the purposes of Sections 198, 309, 311 and 387 of the Companies Act, 1956 provided: i) the sweat equity shares are issued to any director or manager; ii) they are issued for non-cash consideration which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the relevant accounting standards.

In case the non-cash consideration takes the form of a depreciable or amortisable asset, they shall be carried to the balance-sheet in accordance with the relevant accounting standards. Else, they shall be expensed as provided for in the relevant accounting standards.

Lock-in period for sweat equity shares issued under these Rules is three years from the date of allotment.

At each annual general meeting (AGM) of the company, a certificate from the auditors/practising company secretary that sweat equity shares have been allotted in accordance with the resolutions of the company in the general meeting and these Rules is to be placed before the shareholders.

The Rules conclude by saying that in case of sweat equity issued during the accounting period, the accounting value of the sweat equity shares shall be treated as another form of compensation to the employee/director in the financial statements.

The Rules have, by and large, taken bits and pieces from the various types of stock options issued over the years and have added a bit of disclosure requirements. To date, there is no Accounting Standard issued for Sweat Equity issued by the ICAI.

Hence, the use of the words relevant accounting standards at frequent intervals seems odious and is bound to create a great deal of confusion. The DCA would do well to clarify the accounting aspect at an early date.

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