20% and 40% Sweat Equity

The Trend:

Section 18(2)(a) of the Companies Act of Nepal empowers private and public limited companies to include provisions in their Memorandum of Association for investing in the company’s shares through ‘any medium other than cash’. This straightforward provision means investments can be made using resources beyond traditional monetary contributions. In essence, the Act supports the concept of sweat equity. If a company wishes to allocate shares to an individual for their labor or sweat contribution, that individual can gain equity ownership proportional to their efforts.

However, despite the clear intent of Section 18(2)(a), the Office of the Company Registrar did not approve the issuance of share ownership in exchange for sweat or labor contributions. The Registrar’s Office, despite attorneys’ efforts, provided inadequate reasons for denying approval, contending that the provision does not explicitly mention ‘sweat equity’ and is therefore ambiguous about the meaning of ‘any medium other than cash’.

Consequently, due to this trend of interpretation by the Registrar’s Office, applicants for many years, were compelled to engage in cash transactions to acquire shares in the company.

The Changes:

Recently, the Nepal Government issued several ordinances, one of which was overdue to amend the Companies Act and to broaden the unclear sweat equity provision. Several sweat equity provisions were added (Sections 18.3a, 3b, 3c, and 3d) in the Companies Act 2063. The summary of these are:

1. After the incorporation of the company, the promoter or any other individual may have the right to purchase, issue, or have ownership over the company’s shares by any other means apart from cash.
2. Right to issue or sell or have ownership over the company’s shares by the promoter or any other person through other means apart from cash must be approved under a special resolution by the general meetings of the company. Such a special resolution may also decide whether to issue or sell shares at a discount.
3. The basis for issuing or selling or having ownership over the company’s shares by the promoter or any other person through other means apart from cash may be intellectual property, value addition, services, goodwill, technology know-how, or even technical knowledge transfer from such promoter or person to the company. The price of such shares has to be based on the valuation as determined and with reasons by a certified engineer or auditor.
4. The employee may be provided with the company’s share in lieu of the employee’s salary, allowances, and benefits as prescribed in the employment agreement entered between the company and the employee.
5. The shares provided to the promoter or any other person through any other means apart from cash cannot exceed 20% of the paid-up capital of the company.

However, in the case of companies of start-up categories, such shares can be provided up to 40% of the paid capital. 

Employees Stock Ownership Plan:

Similarly, another new change in the ordinance permits employees to have stock options in the company they are working for. The Employees Stock Ownership Plan allows employees, without compulsion, to participate in owning the stock of the company. The company may lay down rules to participate in the stock ownership plan, such as the number of issued shares, eligibility of the employees, deadline to accept the plan, the share price, minimum and maximum share ownership, exit plan, and so on.