Sweat equity shares refer to the shares issued by a company to its employees or directors as a form of remuneration for services rendered, expertise provided, or efforts made towards the growth and success of the company. These shares are issued at a discounted price, lower than the market price, as a recognition of the contribution made by the employees as consideration other than cash.
Section 2(88) of the Companies Act, 2013 defines sweat equity shares as shares issued by a company to its directors or employees at a discount or for consideration other than cash, in recognition of their contribution in providing know-how, intellectual property rights, or value additions to the company. Sweat equity shares are issued to encourage and reward the employees and directors for their hard work and efforts in enhancing the value of the company.
Directors or the employees to whom sweat equity shares can be issued are defined under provisions of the Companies Rules 2014, as under:
As per Rule 8(1) of the Companies (Share Capital and Debentures) Rules, 2014, the following categories of persons are eligible to receive sweat equity shares:
»Permanent employees of the company, whether working in India or outside India.
»Directors of the company, whether whole-time directors or not.
»Employees of the subsidiary companies, whether working in India or outside India.
It is important to note that the eligibility criteria for the issuance of sweat equity shares may vary depending on the specific provisions of the Companies Act, 2013, and the rules made thereunder. Companies must ensure compliance with all relevant provisions and regulations before issuing sweat equity shares to employees or directors.
15% of existing paid-up equity share capital in one year or INR 5 Crore, whichever is higher.
25% of paid-up equity capital at any time.
In case of a Start-Up Company, 50% of paid-up capital for 5 years from the date of its incorporation.
Approval from the Board of Directors: The issuance of sweat equity shares requires the approval of the Board of Directors, which must be passed by a special resolution.
Approval from the shareholders: The issuance of sweat equity shares also requires the approval of the shareholders, which must be passed by a special resolution which is valid for a period of twelve (12) months from the date of passing the special resolution.
Filing with the Registrar of Companies: After the issuance of sweat equity shares, the company must file a return with the Registrar of Companies (ROC) within 30 days of the passing of the special resolution subject to fees payment on filing. The return must include details such as the number and value of the shares issued, the consideration received, and the details of the shareholders who received the shares.
Maximum limit: The total number of sweat equity shares that can be issued by a company is limited to 15% of its existing equity capital.
Lock-in period of 3 years: The lock-in period is of 3 years from date of allotment for the sweat equity shares issued to directors or employees and shall not be transferable within such period.
Restrictions on issuance: The issuance of sweat equity shares is subject to certain restrictions, including that the shares cannot be issued to any person who is a promoter or a director of the company or its holding, subsidiary or the associate company.
Valuation of shares: The shares must be valued by a registered valuer and the valuation report must be attached with the notice filed with the ROC. The valuation is done at fair market value. The report must be obtained not more than 12 months before the date on which the shares are issued.
Disclosures in Board Report: The company must disclose the details of the issuance of sweat equity shares, including the number of shares issued, the name of the recipients, the consideration received, pricing guidelines, principal terms and conditions, reasons for issue, diluted earnings per share pursuant to issue of sweat equity in its board’s report for the financial year.
Register: Maintain the register for sweat equity shares in form SH-3 which is to be authenticated by the CS or the person as authorised by the Board of Directors of the Company.
The securities involved are either specified securities or sweat equity shares.
The securities or sweat equity shares are allotted or transferred on or after April 1, 2009. (Before April 1, 2009 fringe benefit tax is applicable).
Securities or sweat equity shares are allotted by the employer or former employer to the employee.
Securities or sweat equity shares may be transferred to the employee or former employee, directly or indirectly.
Sweat equity shares thus are the ownership interests in a company that are issued to founders, employees, or other contributors in exchange for their hard work, time, and effort, rather than for cash. The idea behind sweat equity is to provide a way for individuals who have contributed to a company's growth to share in its success without having to invest their own money.
Sweat equity can be a useful tool for startups and growing companies to attract and retain talented employees, provide incentives for hard work and dedication, and align the interests of all stakeholders. However, it is important to structure sweat equity agreements carefully, as the terms and conditions of the equity grants can have significant tax and financial consequences for both the company and the individuals receiving the equity.