26 Feb Grasping the Essence of Startups and Sweat Equity Shares
The initiative of Startup India was launched by the Government of India in 2016 with the aim of boosting young and innovative entrepreneurs to initiate their businesses. This flagship mission was introduced under the Department for Promotion of Industry and Internal Trade (DPIIT). In this article, we will explore the concept of startups and delve into how sweat equity shares assist these startups in retaining valuable talent within the company.
Meaning of Startup
The DPIIT, responsible for extending government schemes and incentives to startups, lays down certain criteria for DPIIT recognition:
- Age of the Company: The company should have operated for less than 10 years from its year of incorporation.
- Type of Entity: Accepted entities include Private Limited Companies, Registered Partnership Firms, and Limited Liability Partnerships.
- Annual Turnover: The annual turnover should not exceed Rs. 100 crores in any financial year from incorporation.
- Original Entity: The entity should not have been formed by splitting up or reconstructing an already existing business.
- Innovative and Scalable: It should work towards developing or improving a product, process, or service, with a scalable business model having high potential for wealth and employment creation.
Startups initiate their journey at the stage of incorporation. The process for obtaining DPIIT recognition involves:
- Accessing the startupindia.gov.in portal.
- Filling in essential details such as entity information, address, details of directors and partners, and startup activities.
- Providing patent/trademark details, PAN, CIN, and firm registration number.
- Offering details of startup activities and a self-declaration.
- Upon issuance of a recognition certificate by DPIIT, the startup gains recognition.
Benefits of DPIIT Recognition
Entities recognized by DPIIT enjoy various benefits:
- Reduction in regulatory burden and compliance costs for startups.
- Authorization for self-certification under various laws.
- Eligibility for a three-year tax holiday out of the first ten years of incorporation under Sec.80-IAC.
- Exemption under Sec.56(2)(viib) of the Income Tax Act.
- Access to government plans for setting up Research Parks for startups.
Sweat Equity Shares: Meaning and Relation with Startups
Sweat equity shares refer to equity shares provided by a company to its directors or employees at a discount or in exchange for non-cash consideration, such as expertise or know-how. Startups can issue sweat equity shares, with an amended time limit allowing issuance within the first ten years of incorporation.
Legal Requirements for Issuing Sweat Equity Shares
To issue sweat equity shares, a company must adhere to the following procedures:
- Passing a special resolution, requiring notice to call a shareholder meeting.
- Providing all necessary details in the resolution, including the current market price of shares and the number of shares issued.
- Filing MGT-14 with the ROC after passing the resolution.
- Conducting a board meeting for share allotment and filing PAS-3 with the Registrar.
- Maintaining a register for sweat equity shares (SH-3).
Regulations on Listed Startups Issuing Sweat Equity Shares
Listed companies are subject to additional guidelines when issuing sweat equity shares, including limitations on issuance and valuation requirements.
Conclusion
The government’s decision to permit startups to issue sweat equity shares has injected fresh momentum into these ventures. Sweat equity shares incentivize allottees to enhance their performance, creating a mutually beneficial scenario for employees and companies alike. Thus, sweat equity shares play a vital role in enabling startups to access top-notch technical expertise and knowledge in the market, facilitating their growth.
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