The powers conferred by section 30 of the Securities and Exchange Board of.India Act, 1992 (15 of 1992) read with clause (d) of sub-section (1) of Section 79A of the Companies Act, 1956 (1 of 1956) as inserted by Companies (Amendment) Act, 1999 (1 of 1999) the Board, hereby, makes the following regulations, namely

REGD. NO. D. L.-33004/99 The Gazette of India

EXTRAORDINARY

PART II—Section 3—Sub-section (ii)

PUBLISHED BY AUTHORITY

No. 840 ] NEW DELHI, TUESDAY, SEPTEMBER 24, 2002/ASVINA 2, 1924

2981 GI/2002

(1)2 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC 3(ii)] 3 4 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(ii)] 5 6 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(ii)] 7 8 THE GAZETTE OF INDIA: EXTRAORDINARY IPART II—SEC. 3(ii)l 10 THE GAZETTE OF INDIA EXTRAORDINARY IPAKI II—Stc. 3(ii)l 11 12 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(ii)l 13 14 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(ii)l 15 16 THE GAZETTE OF INDIA : EXTRAORDINARY IPART II—SEC. 3(ii)l '7 *•-•- ''It'/ rii-/d£{ - £;

SECURITIES AND EXCHANGE BOARD OF INDIA

NOTIFICATION

Mumbai, the 24th September, 2002

Securities and Exchange Board of India

(Issue of Sweat Equity) Regulations, 2002

S.0.1O31(E).~- In exercise of the powers conferred by section 30 of the Securities and Exchange Board of.India Act, 1992 (15 of 1992) read with clause (d) of sub-section (1) of Section 79A of the Companies Act, 1956 (1 of 1956) as inserted by Companies (Amendment) Act, 1999 (1 of 1999), the Board, hereby, makes the following regulations, namely :-

CHAPTER I

PRELIMINARY

Short title and commencement. 1. (a) These regulations shall be called the

Securities and Exchange Board of

India ( Issue of Sweat Equity)

Regulations, 2002.

(b) These regulations shall come into force

on the date of their publication in the

Official Gazette.

Definitions. 2. (1) In these regulations, unless the context

otherwise requires :-

(a) 'Act' means the Securities and

Exchange Board of India Act, 1992 ;

(b) 'associate' includes a person,

(i) who directly or indirectly by

himself or in combination with

relatives, exercises control

over the company; or,

(ii) whose employee, officer or

director is also a director,

officer or employee of

another company;

(c) 'Board' means the Board as defined

in clause (a) of sub-section (1) of

section 2 of the Act;

(d) 'control' shall include the right to

appoint majority of the directors or

to control the management or policy

decisions exercisable by a person or

persons acting individually or in

concert, directly or indirectly,

including by virtue of their

shareholding or management rights

or shareholders or voting

agreements or in any other manner;

(e) 'company' means a company as

defined in the Companies Act, 1956;

(f) 'director' means, a director as

defined in sub-section (13) of

section 2 of the Companies Act,

1956;

(g) 'employee' means ;

(i) a permanent employee of the

company working in India or

abroad or

(ii) a director of the company,

whether a whole time director or

not.

(h) 'ESOS' means an Employees Stock

Option Scheme as defined in

Securities and Exchange Board of

India (Employees Stock Option

Scheme and Employees Stock

Purchase Scheme) Guidelines,

1999;

(i) 'insider' means an insider as defined

in clause (e) of regulation 2 of

Securities and Exchange Board of

India (Prohibition of Insider Trading)

Regulations, 1992 ;

(j) 'merchant banker' means a

merchant banker registered under

section 12 of the Act;

(k) 'promoter' means promoter as

defined in clause (h) of sub-

regulation (1) of regulation 2 of the

Securities and Exchange Board of

India (Substantial Acquisition of

shares and Takeovers) Regulations,

1997;

(I) 'registrar' means a registrar to an

issue and includes a share transfer22 THE GAZETTE OF INDIA : EXTRAORDINARY [PAKTII—SF.C. 3(ii)] agent registered under section 12 of

the Act;

(m)'securities' means securities as

defined in clause (h) of section 2 of

the Securities Contracts

(Regulation) Act, 1956 (42 of 1956) ;

(n) 'statutory auditor' means an auditor

appointed by a company under

section 224 of the Companies Act

1956(1 of 1956) ;

(o) 'Recognised Stock Exchange'

means a stock exchange which has

been granted recognition under

section 4 of the Securities Contracts

(Regulation) Act, 1956 (42 of 1956);

(p) 'sweat equity shares' means sweat

equity shares as defined in

Explanation II of Sub-section (1) of

Section 79A of the Companies Act,

1956;

(q) "Schedule" means a schedule to

these Regulations ;

(r) 'valuer¹ means a Chartered

Accountant or a merchant banker

appointed to determine the value of

the intellectual property rights or

other value addition ;

(2) Words and expressions not defined in these

regulations shall have the same meaning as

have been assigned to them under the Act or23 the Securities Contracts (Regulatic ^ Act,

1956 or the Companies Act, 1956, or en ^

statutory modification or re-enactment thereof,

as the case may be.

Applicability. 3. Nothing contained in these regulations shall

apply to an unlisted company.

Provided the unlisted company coming out with

initial public offering and seeking listing of its

securities on the stock exchange, pursuant to

issue of sweat equity shares, shall comply with

the Securities and Exchange Board of India

(Disclosure and Investor Protection)

Guidelines, 2000.

CHAPTER II

ISSUE OF SWEAT EQUITY BY A LISTED COMPANY

Sweat equity shares may 4. A company whose equity shares are listed on a be issued to employee, recognised stock exchange may issue sweat promoter. equity shares in accordance with Section 79A

of Companies Act, 1956 and these

Regulations to its-

(a) Employees

(b) Directors

Special Resolution. 5. (1)For the purposes of passing a special

resolution under clause (a) of sub-section (1) of

section 79A of the Companies Act, 1956 the

explanatory statement to be annexed to the2 4 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(nYI notice for the general meeting pursuant to

section 173 of the Companies Act, 1956 shall

contain disclosures as specified in the

Schedule.

(2) The issue of sweat equity shares to promoters

shall be subject to the requirements specified

in Regulation 6 of these Regulations.

Issue of Sweat Equity 6.(1) In case of issue of sweat equity shares to Shares to Promotors. promoters, the same shall also be approved by

simple majority of the shareholders in General

Meeting.

Provided that for passing such resolution,

voting through postal ballot as specified under

Companies (Passing of the resolution by

Postal Ballot) Rules 2001 shall also be

adopted.

Provided further that the promoters to whom

such Sweat Equity Shares are proposed to be

issued shall not participate in such resolution.

(2) Each transaction of issue of Sweat Equity shall

be voted by a separate resolution.

(3) The resolution for issue of Sweat Equity

shall be valid for a period of not more than

twelve months from the date of passing of the

resolution.

(4) For the purposes of passing the resolution, the

explanatory statement shall contain the

disclosures as specified in the Schedule.

Pricing of Sweat Equity 7.(1) The price of sweat equity shares shall not be Shares.

less than the higher of the following :-

(a) The average of the weekly high and low of

the closing prices of the related equity25 shares during last six months preceding

the relevant date; or

(b) The average of the weekly high and low of

the closing prices of the related equity

shares during the two weeks preceding the

relevant date.

Explanation:-

"relevant date" for this purpose means the date

which is thirty days prior to the date on which

the meeting of the General Body of the

shareholders is convened, in terms of clause

(a) of sub-section (1) of section 79A of the

Companies Act.

(2) If the shares are listed on more than one stock

exchange, but quoted only on one stock

exchange on the given date, then the price on

that stock exchange shall be considered.

(3) If the share price is quoted on more than one

stock exchange, then the stock exchange

where there is highest trading volume during

that date shall be considered.

(4) If shares are not quoted on the given date,

then the share price on the next trading day

shall be considered.

Valuation of Intellectual 8,(1) The valuation of the intellectual property rights Property. or of the know-how provided or other value

addition mentioned in Explanation II of sub-

section (1) of Section 79A of the Companies &*sr£9r/o£-§\.

Act, 1956 shall be carried out by a merchant

banker.

(2) The merchant banker may consult such

experts and valuers, as he may deem fit having

regard to the nature of the industry and the

nature of the property or other value addition.

(3) The merchant banker shall obtain a certificate

from an independent Chartered Accountant

that the valuation of the intellectual property or

other value addition is in accordance with the

relevant accounting'standards.

Accounting Treatment. 9. (1) Where the sweat equity shares are issued for a

non - cash consideration, such non-cash

consideration shall be treated in the following

manner in the books of account of the

company :-

(a) where the non-cash consideration takes

the form of a depreciable or amortizable

asset, it shall be carried to the balance

sheet of the company in accordance with

the relevant accounting standards; or

(b) where clause (a) is not applicable, it shall

be expensed as provided in the relevant

accounting standards.

Placing of Auditors 10. In the general meeting subsequent to the Certificate Before issue of sweat equity, the Board of Directors Annual General shall place before the shareholders, a

Mooting. certificate from the auditors of the company

that the issue of sweat equity shares has been

made In accordance with the Regulations and

in accordance with the resolution passed by27 the company authorizing the issue of such

Sweat Equity Shares.

Ceiling on Managerial 11. The amount of Sweat Equity shares issued Remuneration. shalf be treated as part of managerial

remuneration for the purposes of sections 198,

309, 310, 311 and 387 of the Companies Act,

1956 if the following conditions are fulfilled :

(i) the Sweat Equity shares are issued to

any director or manager; and,

(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.

Lock-In of sweat equity shared. 12- (1)Th$ Sweat Equity shares shallbe

locked in for a period of three years from

the date of allotment.

(2) Th0 Securities and Exchange Board of

India (Disclosure and Investor

Protection) Guidelines, 2000, on public

issue In terms of lock-in and

computation of promoters' contribution

shall apply if a company makes a public

issue after it has issued sweat equity.

Listing. 13. The Sweat Equity issued by a listed

company shall be eligible for listing only

if such issue are in accordance with

these regulations.

2.W3L./03.-5

Applicability of Takeover. 14. Any acquisition of Sweat Equity Shares

shall be subject to the provision of

Securities and Exchange Board of India

(Substantial Acquisition of Shares and

Takeovers) Regulations, 1997.

CHAPTER III

GENERAL OBLIGATIONS

Obligations of the Company. 15. (1)The company shall ensure that -

(a) The Explanatory Statement to the

notice for general meeting shall

contain certain disclosures as are

specified under clause (b) of Sub-

section (1) of Section 79A of the

Companies Act, 1956 and sub-

regulation (1) of Regulation 5.

(b) Auditor's certificate as required

under Regulation 10 shall be

placed in the general meeting of

shareholders.

(c) The company shall within seven

days of the issue of sweat equity,

issue or send statement to the

recognized stock exchange,

disclosing :

(i) number of sweat equity

shares ;

(ii) price af which the sweat

equity shares are issued ;

(iii) total amount invested in

sweat equity shares ;

(iv) details of the persons to

whom sweat equity shares

are issued; and,

(v) the consequent changes in

the capital structure and

the shareholding pattern

after and before the issue

of sweat equity.

Action against intermediaries. 16. The Board may, on failure of the

merchant banker to comply with the

obligations under these regulations or

failing to observe due diligence in

respect of valuation of intellectual

property or value addition, initiate action

against the merchant banker in terms of

Securities and Exchange Board of India

(Merchant Bankers) Regulations, 1992.

CHAPTER IV

PENALTIES AND PROCEDURE

Power of the Board to order 17. (1)The Board may, suo-motu or upon inspection or Investigation. information received by it, cause an

inspection to be made of the books of

account or other books and papers of

any company or an investigation to be

made in respect of the conduct and

affairs of any person associated with the

process of Sweat Equity, by appointing

an officer of the Board.

Provided that no such inspection or

investigation shall be made except for

the purposes specified in sub-

regulation^).

(2) The purposes referred to in sub-

regulation (1) are the following, namely:-

(a) to ascertain whether there are

any circumstances which would

render any person guilty of

having contravened any of these

regulations or any directions

issued thereunder;

(b) to investigate into any complaint

of any contravention of the

regulation, received from any

investor, or any other person;

(3) An order passed under the sub-

regulation (1) shall be sufficient authority

for the Inspecting or Investigating Officer

to undertake the inspection or

investigation, as the case may be and

on production of an authenticated copy

of the order, the person concerned shall

be bound to carry out the duty imposed

in Regulation 18.

Duty to produce records, etc. 18.(1) It shall be the duty of every person in

respect of whom an inspection or

investigation has been ordered under31 regulation 17, to produce before the

inspecting or the investigating Officer

such book, accounts and other

documents in his custody or control and

furnish him with such statements and

information as the said officer may

require from the purposes of the

inspection or investigation.

(2) Without prejudice to the generality of the

provisions of sub-regulation (1), such

person shall -

(a) extend to the Inspecting or

Investigating Officer reasonable

facilities for examining any books,

accounts and other documents in

his custody or control (whether

kept manually or in computer or

in any other form) reasonably

required for the purposes of the

inspection or investigation;

(b) provide such ' Inspecting or

Investigating Officer copies of

such books, accounts and

records which, in opinion of the

Officer, are relevant to the

inspection or investigation or, as

the case may be, allow him to

take out computer printouts

thereof.

(c) provide such assistance and co-

operation as may be required in

connection with the inspection or

investigation and furnish

information relevant to such

inspection or investigation as

may be sought by such officer.

(3) The Inspecting or Investigating Officer

shall for the purpose of inspection or

investigation, have the full powers;

(a) of summoning and enforcing the

attendance of persons;

(b) to examine orally and to record

on oath the statement of the

persons concerned, any director,

partner, member or employee of

such person.

Submission of Report to the 19(1) The Inspecting or Investigating Officer Board.

shall, on completion of the inspection or

Investigation after taking into account all

relevant facts and circumstances,

submit a report to the Board.

(2) On the receipt of report under sub-

regulation (1), the Board may initiate

such action as it may be deemed fit to

do in the interests of investors and the

securities market.

Power of the Board to issue 20. The Board may in the interests cf *he directions.

securities market and without prejudice

to its right to initiate action including

criminal prosecution under section 24 of

the Act or Section 621 of Companies

Act, 1956 give such directions as it

deems fit including: -

(a) directing the person concerned

not to further deal in securities in

any particular manner;

(b) directing the person concerned to

sell or divest the sweat equity

shares acquired in violation of the

provisions of these Regulations

or any other law or regulations;

(c) prohibiting the persons

concerned, from accessing the

securities market;

(d) directing the disgorgement of any

ill-gotten gains or profit or

avoidance of loss.

(e) restraining the company from

making a further offer for sweat

equity.

SECURITIES AND EXCHANGE BOARD OF INDIA

(Issue of Sweat Equity) Regulations, 2002

SCHEDULE

[Under Regulation 6(4)]

The explanatory statement to the notice and the resolution proposed to be passed in the general meeting for approving the issuance of sweat equity shall, inter alia, contain the following information : -

a) The total number of shares to be issued as sweat equity.

b) The current market price of the shares of the company.

c) The value of the intellectual property rights or technical know how or other value addition to be received from the employee or director along with the valuation report / basis of valuation.

d) The names of the employees or directors or promoters to whom the sweat equity shares shall be issued and their relationship with the company.

e) The consideration to be paid for the sweat equity.

f) The price at which the sweat equity shares shall be issued.

g) Ceiling on managerial remuneration, if any, which will be affected by issuance of such sweat equity.

h) A statement to the effect that the company shall conform to the accounting policies as specified by the Board.

i) Diluted Earning Per Share pursuant to the issue of securities to be calculated in accordance with International Accounting Standards / standards specified by the Institute of Chartered Accountants of India.

|F. No SEBI/LF./22/O2/18523]

G N BA.IPAI. Chairman 1 ' i m k d ln lhL- M m u y c r. CioW ,,| I n du IVL-.V., Rinj, R o a d. M u v i p u r i. Xow lk-lhi-1 lo<)(,4

.mil riibliMk-d hv ||U. C i m i i o l l cr ul I'uhln.-.ihonv I ) c l h i - 1 1 0 0 5 -1