What is Sweat Equity

The term Sweat Equity has recently gained immense importance in the corporate world. In simple terms, Sweat Equity shares refer to Equity Shares given to the employees of an organization in favorable terms, generally at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or other value additions to the Company.

Sweat Equity shares enable companies to increase directors’ and employee’s stake in the ownership of the company, thus encouraging them contribute more towards the development of the Company.

The issue of Sweat Equity Shares is regulated by Section 54 of the Companies Act, 2013 read with Companies Rule 8 of (Share Capital and Debentures) Rules, 2014

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Sweat Equity Shares

Who is eligible for Sweat Equity Shares?

  • A permanent employee of the company, its holding or subsidiary, whether working in or outside India for at least one year.
  • A director of the Company except Independent Directors.

Conditions for issue of Sweat Equity:

Quantum of Sweat Equity Shares:

  • The value of shares issued should not be more than 15% of paid up capital of the company in a year or Rs. 5 crore; whichever is less.
  • Total value of sweat equity shares issued by a Company shall not exceed 25% of the paid up capital of the company at any point of time.

Valuation of Sweat Equity Shares:

  • Sweat Equity Shares shall be valued at a price determined by a registered valuer.
  • When shares are issued in lieu of making available intellectual property rights or providing know-how, valuation of such Services or Know how shall also be carried out by Registered Valuer. Valuation of services or assets is important as that will determine the number of shares which are to be allotted.

Other Conditions:

  • For issue of Sweat Equity, the company should be in existence and carrying on business for a period of one year or more.
  • The sweat equity shares issued to directors or employees shall be locked in i.e.non-transferable for a period of three years from the date of allotment.
  • The amount of sweat equity shares issued shall be treated as part of managerial remuneration.
  • Only the class of shares which is already issued to the shareholders can be issued as sweat equity shares and all the conditions applicable to that class of equity shares shall be applicable to the sweat equity shares.
  • A listed company can issue sweat equity shares as per the rules and regulations prescribed by SEBI in this regard.

Procedure for Issue of Sweat Equity Shares as per Companies Act 2013

  • Obtain Approval of the Board of Directors for Issue of Sweat Equity
  • Obtain the Approval of the Shareholders of the Company for such issue through a Special Resolution.
  • Allotment of Sweat Equity is to be completed within 12 months of the date of passing the resolution by fulfilling all the applicable conditions.
  • File necessary e-forms with the MCA for such allotment.
  • Once the approval of MCA is obtained, the process of Issue of Sweat Equity Shares stands complete.
  • Maintain a Register of Sweat Equity Shares in Form No. SH.3
  • There should be a detailed disclosure in the Board Report of the Company about the terms and conditions of the Sweat Equity Shares issued.

It is suggested to formalize the agreement of issue of Sweat Equity on paper to avoid confusion and miscommunication. Building a restricted stock agreement, with a buy-back right can bring down risk. It is a good idea to hire a legal consultant or a finance expert to understand the fine lines better.

VenturEasy can help startups with sweat equity procedures. Email at hello@ventureasy.com.

Nikita Bhatia is the co-founder of VenturEasy, an online platform for Company registration, book-keeping, accounting, tax consultancy and legal compliances in India. A Chartered Accountant and company secretary by profession, she has wide experience in the fields of audit, accountancy, taxation and corporate governance.