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| Rendezvous sweat equity violates guidelines |
| Abhineet Kumar & Joe C Mathew / Mumbai/Delhi Apr 17, 2010, 00:41 IST |
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Rendezvous Sports World, part of the consortium that owns Kochi franchise of the Indian Premier League (IPL), may not be technically having the “sweat equity” that they claim to have.
Rendezvous has a 26 per cent stake in the unincorporated joint venture (UJV) that owns Kochi Franchise. Out of this, 25 per cent they claim to have received as “sweat equity” for the management service they would render in running the franchise.
According to the Companies Act, sweat equity is allotted to a person for his contribution of tangible or non-tangible asset to a company. For instance, if a person works for creating patents for a company, then the company can issue equity to him, instead of paying cash. It could be issued for many other things such as providing technical know how, brand or copyright. It is basically issuing share instead of cash for a service provided.
What is unique about Rendezvous is that their “sweat equity” is “undilutable in perpetuity” and it has a lock-in period of just two years.
According to consultancy firm PricewaterhouseCoopers, the Companies Act norms do not make sweat equity “undilutable in perpetuity”. It means when new equity is issued by a company to a third party, then the promoters’ as well as the sweat equity holder’s stake is diluted accordingly. Besides, the lock-in period in the Companies Act is three years.
More than that the Companies Act allows an unlisted company to issue up to 15 per cent, or worth up to Rs 5 crore, in a year under sweat equity allotment. “If the allotment is more than 15 per cent in a year, then it will not be treated as sweat equity, unless the central government approval is taken,” said Joy Jain, executive director at PWC.
Officials at Ministry of Corporate Affairs said they had not received any request for authorising 25 per cent sweat equity allotment.
“There is no clarity in this case as to the terms and conditions that led to the grant of sweat equity. The corporate affairs ministry should clarify, if the current rules under the Companies Law (that binds issue of sweat equity by unlisted companies) has been flouted in this case,” said Manoj Kumar, senior partner, Hammurabi & Solomon, a Delhi-based legal consultancy firm.
There are five other partners in the UJV that owns Kochi franchisee. Out of this, Anchor Earth, Parinee Developers, Film Waves Combines own 27 per cent, 26 per cent and 12 per cent, respectively. While Anand Shyam Estates owns 8 per cent, Vivek Venugopal has 1 per cent. These partners are the financial investors, while Rendezvous will take care of the management.
Meanwhile, Sunanda Pushkar, the woman at the centre of an ownership controversy surrounding the Kochi IPL franchise, is considering filing for damages and has hired a Dubai-based lawyer for the purpose.
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