Start-up companies given leeway to allot sweat equity shares up to 10 years

KR Srivats New Delhi | Updated on June 08, 2020

Move to help start-ups attract talent, say corporate law experts

The Central government has allowed start-up companies to issue sweat equity shares (not exceeding 50 per cent of paid-up capital) for a period of up to 10 years from the date of its incorporation or registration.

Prior to this liberalisation, they could do so only within five years of incorporation or registration. This latest change has been enabled by the Corporate Affairs Ministry (MCA) through rule change in the existing norms for issue of capital and debentures, official sources said.

Commenting on the MCA move, Vaibhav Kakkar, Partner, L&L Partners, said this is a welcome liberalisation from the perspective of start-up companies, which can now issue sweat equity shares not exceeding 50 per cent of its paid-up capital for up to 10 years as against the current cap of 5 years.

“This provides a longer runway for start-ups to crystallise their shareholding structures and would allow them to substantially incentivise and retain key personnel in the long run,” Kakkar said.

Ankit Singhi, Partner, Corporate Professionals, said that increase in the period of allotment will definitely help a start-up attract talent.

Also, the MCA has now replaced the old definition of start-up (issued in February 2016 by DIPP) with the new definition that was issued in February 2019. This will remove ambiguity, he said.

The MCA has also now amended rules to specify that a listed company that has privately placed its debentures will not be required to invest or deposit, as the case may be , a sum not less than 15 per cent of the amount of its debentures maturing during the year, ending on March 31 of the next year on or before April 30 in each year.

“Relaxation to listed companies from investing certain percentage of maturing deposits will certainly lead to availability of funds and easing of liquidity position,” Singhi said.

Published on June 08, 2020

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