How to Issue Sweat Equity?

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Sweat equity shares are the shares, issued by a Company to its employees or directors at a discounted price or for a consideration, other than cash. These shares are issued for providing their expertise or making rights accessible in the nature of valuable intellectual property rights or value additions etc.

As per (Share Capital and Debentures) Rules, 2014 there are certain restrictions on the issuance of the sweat equity shares as follows:-

  1. A company which is not a listed company,  is not required to comply with the Securities and Exchange Board of India Regulations (SEBI) on sweat equity, will not issue sweat equity shares to its  employees or directors  at a discount or for a consideration other than cash, for their providing expertise or making available the  rights in the nature of intellectual property rights or  key value additions, or  by whatever name called, unless this issue is sanctioned by a special resolution passed by the company in general meeting.
  2. The special resolution authorizing the issue of sweat equity shares will be only be valid for making the allotment within a period of twelve months from the date of passing of this special resolution.
  3. The company is not authorized to issue sweat equity shares exceeding fifteen percent of the existing paid up equity share capital in a year or the shares of issue value of rupees five crores, whichever happens to be higher. Provided the issuance of sweat equity shares in the company does not exceed twenty five percent, of the paid up equity capital of the Company at any given time.
  4. The sweat equity shares issued to employees or directors will be locked in/non-transferable for a three year period from the date of the allotment and the fact that the share certificates are under lock-in and the period of expiry of lock in will be stamped in bold or mentioned in a prominent manner on the share certificate.
  5. The sweat equity shares which are to be issued will be valued at a price which is determined by a registered valuator as a fair price giving justification for such valuation.
  6. The valuation of intellectual property rights or of the expertise or key value additions for which the sweat equity shares are to be issued, will be carried out by a registered valuator, who will provide a proper report that is addressed to the Board of directors with a justification for such valuation.
  7. Where ever sweat equity shares are issued for any non-cash consideration on the basis of a valuation report in respect thereof acquired from the registered valuator, such a non-cash consideration will be treated in the following manner in the  account books  of the company-
  • when the non-cash consideration takes form of a depreciable or an amortizable asset, then  it will be carried to the balance sheet of the company in accordance with accounting standards; or
  • When clause (a) it is not applicable, it will be expensed as provided in the accounting standards.
  1. The amount of sweat equity shares that are  issued by the company will be treated as part of a  managerial remuneration for the purposes of sections 197 and 198 of the Act, if the below given conditions are fulfilled, namely.-
  • The sweat equity shares are issued to any  manager or director or; and
  • They are issued for the consideration other than cash, which doesn’t take the form of an asset which can be carried to the balance sheets of the company in agreement with the applicable accounting standards.
  1. In respect of the sweat equity shares that are issued during an accounting period, the accounting value of the sweat equity shares will be treated as a form of compensation to the director or the employee in financial statements of the company, if sweat equity shares aren’t issued pursuant to acquisition of an asset.
  2. If the sweat equity shares are issued pursuant to acquisition of an asset, the value of the asset, which has been determined by the valuation report, will be carried in the balance sheets as per Accounting Standards and such amount of the accounting value of the sweat equity shares that is in excess of value of the asset acquired, in accordance with the valuation report, will be treated as a form of compensation to the director or the employee in the financial statements of the company.
  3. The Board of Directors will disclose in the Directors Report for the year where such shares are issued, the following details of  the issue of sweat equity shares namely:-
  • The class of directors or employees to whom the  sweat equity shares were issued
  • The class of shares  that were issued as Sweat Equity Shares
  • the number of sweat equity shares  that were issued to the directors, main managerial personnel or other employees showing separately the number of such shares issued to them , if any, for the consideration that is other than cash and the individual names of the allot tees holding on to one percent or more of the issued share capital
  • The justification or reasons for the issue
  • The principal terms and conditions for  the issue of sweat equity shares, including the  pricing formula
  • The total number of shares arising as a result of the issue of sweat equity shares
  • The percentage of sweat equity shares of the total post issued and the  paid up share capital
  • The consideration (including consideration other than cash) received or  the benefit accrued to the company from issue of  the sweat equity shares
  • The diluted Earnings per Share (EPS) pursuant to  the issuance of sweat equity shares

The company will maintain a Register of the Sweat Equity Shares in Form No. SH.3 and will forthwith enter the particulars of the Sweat Equity Shares issued under section 54.

  • The Register of  the Sweat Equity Shares will be maintained at the registered office of the company or any such other place as the Board may decide
  • The entries in the register will be authenticated by Company Secretary of the company or by any other person authorized by the Board for the purpose
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A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.

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