In what seems to be an onslaught by regulators on the IPL, the Ministry of Corporate Affairs (MoCA) is set to examine whether team owners have violated Company Law provisions in issuing sweat equity to their shareholders. ‘Sweat’ equity is given as an advance incentive and typically turns into tradeable shares after a lock-in period.
While the Finance Ministry has sprung into action on questions surrounding taxation and other aspects, the regional directors under MoCA will look at the entire gamut of financial dealings between team owning entities and shareholders.
The ministry has asked the Registrar of Companies (RoC), which maintains and monitors corporate records, to come out with a
detailed report on shareholder agreements, memoranda of association, incorporation documents and other mandatory filings
that disclose company information. A key issue is specific information concerning sweat equity.
“The fact is that the IPL is regulated by only the Law of Contract. The details that are emerging show that many provisions of the Companies Act may have been violated. There isn't even clarity on how the bidding was conducted,” said one source on condition of anonymity. However, corporate affairs minister Salman Khurshid said the drill was “part of the normal routine” that RoC follows for all companies. “It is more like homework. I would not jump the gun. Let us not assume there has been any violation at this point,” Khurshid said. He added that if any irregularities were found, there would be action.
Under stringent Indian Company Law, all unlisted companies can issue sweat equity, but they need to clearly outline reasons for it, the names of the persons to whom the equity is being issued and the person’s relationship with the company.
In addition, unlisted companies require an independent ‘valuer’ to determine the price at which sweat equity is issued and
sweat equity shares for more than 15% of total paid up equity share capital in a year or shares of the value of Rs 5 crore, whichever is higher, cannot be given except with the prior approval of the Central Government. The company also has to give a statement to the effect that it shall conform to the accounting policies specified by the Centre.