In common parlance, a Start Up is a project undertaken by an entrepreneur with the goal of developing a scalable business model. On January 16, 2016, the Government of India launched the Start Up India initiative to streamline and promote all such brainchild ideas. It aimed to create a strong network that would nurture all innovative ideas, resulting in massive wealth and job creation. A Start Up is a newly established business that differs from a traditional business in some ways.

The Beginning Under the leadership of Prime Minister Shri Narendra Modi, India has launched a number of initiatives. To ensure consistency across all enterprises, the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry (MCI), and Government of India have established the following prerequisites for being classified as a Start-up:

• Age of the Company: Incorporated less than 10 years age
• Type of Company: Should have been incorporated as a Private Limited Company, Partnership Firm, or Limited Liability Partnership.
• Annual turnover: The entity's turnover for any fiscal year since incorporation should not exceed INR 100 Crores.
• Original Entity: The Company should not have been formed through the division or restructuring of an existing business. It should be initiated by the promoters.
• Innovative and Scalable: The entity should strive for product and service innovation, development, and improvement. Furthermore, the business model should be scalable in order to generate wealth and employment.

Registration Procedure with Startup India

• Incorporate Business: Obtain a Certificate of Incorporation/Partnership Registration, a PAN, and other required documents.
• Register with Start Up India: Log on to the Start Up India website and, after filling out the online forms, create a Start Up India profile.
• Get DPIIT Recognition: This allows the startup to take advantage of various benefits, relaxations, and exemptions. By filling out the form, you can apply for recognition online.
• Documents required for Registration: Incorporation Certificate, Director Information, Proof of Concept (such as a website link or video), PAN, and Patent/Trademark Information (Optional)
• Recognition Number: A recognition number is generated immediately upon application for recognition. After validating all of the documents, the certificate of recognition is issued within two days. If documents are uploaded incorrectly, the start-up will be fined up to 50% of its paid-up capital, with a minimum fine of INR 25,000.

Benefits from DPIIT

Companies registered under DPIIT are eligible for various benefits.

• Registration for a new business is a simple and straightforward process.
• Tax Exemption for three years (Sec 80 IAC)
• Various advantages in terms of intellectual property rights(IPR)
• The government will ensure that a fund of funds is infused into the startup ecosystem.
• Relaxation of public procurement rules for new businesses
• Self-certification is permitted in order to comply with labor and environmental laws.
• In the event of a startup failure, a faster exit and simple winding up process is designed.
• Several research parks are in the works to provide start-ups with R&D facilities.

Startup India Scheme - Eligibility, Registration and Benefits

Startup India Scheme - Eligibility, Registration and Benefits

Sweat Equity Shares in Startups

Sweat equity shares are equity shares granted by a company to its employees or directors in exchange for their expertise and time spent establishing the business. It gives them a sense of ownership, and they can benefit if the company's valuation rises.

According to Section 2(88) of the Companies Act 2013, Sweat Equity shares are shares issued by a company to its directors or employees for non-cash consideration or at a discount in exchange for making intellectual property rights available or providing know-how or any value additions in any form.

Startups in their early stages of development frequently face cash constraints, so they resort to sweat equity shares to reward their employees.

Quantum for Sweat Equity Shares Issuance - Sweat Equity Shares shall not be issued by the Company for more than:

• 15% of the existing Paid-up Equity Share Capital in a year, or 
• INR 5 crores in shares issue value, whichever is greater.

For a period of ten years from the date of incorporation, a Start-up may issue Sweat Equity shares equal to up to 50% of the Paid-up Capital.

Valuation of Sweat Equity Shares

Sweat Equity Shares issued to Directors and key employees must be locked in or made nontransferable for three years from the date of allotment. The lock in period must be stated in bold and prominent letters on the share certificate. In addition, the Board of Directors must disclose the issuance of Sweat equity shares in the Director's Report for that year.

Procedure of Issuance of Sweat Equity Shares

• A Board Meeting is called with at least 7 days' notice to discuss the proposal of issuing Sweat Equity shares and to set the date for the EGM.
• Issue a notice of the General Meeting at least 21 days before the meeting date, with an explanatory statement attached.
• In the called General Meeting, pass a resolution authorizing the issuance of Sweat Equity Shares. Within 30 days of passing the resolution, submit form MGT-14 to the Registrar.
• Call the next Board Meeting to pass the resolution for share allotment. After the resolution has been passed, submit form PAS - 3 to the Registrar within 30 days. Shares must be issued within 12 months of the special resolution being passed.
• Following the distribution of shares, the Company shall keep a register of sweat equity shares in form SH-3 with all the details and particulars of the shares distributed.

Taxability of Sweat Equity Shares

Sweat Equity Shares are taxable in the hands of Employee in two instances:

• At the time of Allotment – Will be taxable under the head Salary in the year in which shares are allotted or transferred to the employees
• At the time of sale of such sweat Equity Shares – Will be taxable under the head Capital Gains in the year in which such shares are transferred by the Employee

The benefits of this amendment are

Normally the lock-in period for sweat equity shares is 3years. Therefore, after 3 years KMPs or directors holding sweat equity shares can encase their shares and move on.

However, now as the time limit is 10 years, company can issue the sweat equity shares again to its employees and can get their services.

It will specially benefit the industries where the technology keeps on changing rapidly. As they will have something to offer to their new entrants or retain the old employees.

Now we will understand the legal requirements for issuing sweat equity shares.

Regulations on a Listed Startup while issuing Sweat Equity Shares

SEBI regulates the operations of a listed company. So, there are some additional guidelines for listed entities while issuing sweat equity shares. The guidelines include:-

• Employee- The meaning of employee for this purpose means,
• Any employee whether working in India or Abroad.
• A director, whether whole time director or not.
• Limit on issue of Shares- The quantum of sweat equity shares that can be issued are-

1.The amount of sweat equity shares cannot be more than 15% of existing paid up equity share capital in a year.

2. Issuance of sweat equity shares cannot exceed the 25% of paid up equity share capital of a company at any time.

3. For start-ups that are listed under Innovators Growth Platform above limits are relaxed . These companies can issue more than 15% but the overall limit of 50% of paid up equity share capital cannot be exceeded. Such issue can be made up to 10 years of incorporation.

• Resolution- The Company needs to pass a special resolution for issue sweat equity shares. The issue should take place within 12 months of the resolution.
• Valuation- A merchant banker should do the valuation. The merchant banker can obtain a certificate from an independent chartered accountant that valuation is as per accounting standards. He can also consult experts and valuers in this regard.

FAQ on Startup India and Sweat Equity Shares

Q: What is the Startup India Scheme?

The Startup India Scheme is a government initiative aimed at promoting and supporting the growth of startups in India. The scheme was launched in 2016 and is administered by the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry.

Q: What are the objectives of the Startup India Scheme?

The main objectives of the Startup India Scheme are to:

• Encourage entrepreneurship and innovation in India
• Provide a conducive ecosystem for the growth of startups
• Facilitate access to funding, mentorship, and other resources
• Promote the growth and development of the startup ecosystem in India

Q: What are the benefits of the Startup India Scheme?

The Startup India Scheme offers a range of benefits to eligible startups, including:

• Tax exemptions on profits for three years
• Relaxation of certain regulations and compliance requirements
• Access to funding through the Startup India Seed Fund and other schemes
• Mentorship and support from industry experts and incubators
• Intellectual property (IP) protection through the Startup Intellectual Property Protection (SIPP) scheme
• Access to government procurement opportunities through the Startup India Procurement Policy

Q: What are sweat equity shares?

Sweat equity shares are ownership stakes in a company that are given to individuals in exchange for their contributions to the business, such as their time, effort, or expertise. These shares are typically issued to founders or employees who have helped to build and grow the company, but have not made a financial investment in it.

Q: How do sweat equity shares work in India?

In India, sweat equity shares are governed by the Companies Act, 2013 and the Securities and Exchange Board of India (SEBI) guidelines on employee stock options. Under these rules, companies can issue sweat equity shares to founders, employees, or directors of the company, provided certain conditions are met.

Q: What are the conditions for issuing sweat equity shares in India?

To issue sweat equity shares in India, a company must:

• Obtain the approval of its board of directors and its shareholders
• File a resolution with the Ministry of Corporate Affairs (MCA)
• Issue a public notice at least 21 days before the issue of sweat equity shares
• Provide certain disclosures in its financial statements, including the number of sweat equity shares issued, their face value, and the basis for their issuance

Conclusion

The order of government to allow sweat equity shares by a startup has given a new push to these startups. As the sweat equity shares help the allottees to perform their duties better. The more the growth of business, more will be the market value of their shares. It is a win-win situation for both the employee and the company. So this is how, sweat equity shares help the startups to grow their business. As they enable a company to get best technical know-how and expertise in the market.

About Jordensky

At Jordensky, we are committed to providing an experience of the highest caliber while specializing in accounting, taxes, MIS, and CFO services for startups and expanding businesses.

When you work with Jordensky, you get a team of finance experts who take the finance work off your plate– ”so you can focus on your business.

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