What is Sweat Equity Share?

Sweat Equity shares refer to equity shares issued by a company to its employees or directors at a discount or for consideration, other than cash, for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Legal Framework: The issuance of Sweat Equity is regulated by Section 54 read with Rule 8 of the Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules, 2014. According to these provisions, a company can issue sweat equity shares to its directors or employees at a discount or for consideration, other than cash, for providing their expertise or intellectual property.

The expression ‘Employee‘here means:

(a) a permanent employee of the company who has been working in India or outside India; or

(b) a director of the company, whether a whole-time director or not; or

(c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company;

The expression ‘Value additions’ means :

actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights, by such person to whom sweat equity is being issued for which the consideration is not paid or included in the normal remuneration payable under the contract of employment, in the case of an employee.

Conditions and Restrictions

• Approval: A company must obtain approval from shareholders in a general meeting before issuing sweat equity shares. The resolution must specify the number of shares, the current market price, and the consideration including the consideration other than cash.  The special resolution authorizing the issue of sweat equity shares shall be valid for making the allotment within a period of not more than twelve months from the date of passing of the special resolution.
• Valuation: The valuation of intellectual property or know-how for issuing sweat equity must be conducted by a registered valuer.
• Lock-in Period: Sweat equity shares are subject to a lock-in period for a minimum period of three years from the date of allotment.
• Limitation: The aggregate number of sweat equity shares issued in a company cannot exceed 15% of the existing paid-up equity share capital or shares of the company at any time.
• Rights and Restrictions: Sweat equity shareholders have the same rights as other equity shareholders, including dividends and voting rights.

Benefits of Sweat Equity

• Retaining Talent: Sweat Equity is an excellent tool for retaining talented employees and motivating them to contribute to the long-term success of the company.
• Conservation of Cash: By issuing shares instead of cash, companies can conserve their cash reserves for other business activities.
• Aligning Interests: Employees holding sweat equity shares are more likely to align their interests with the company’s performance, thereby fostering a sense of ownership and dedication.

Conclusion

Sweat Equity, as provided by the Companies Act, 2013, stands as a testament to the dynamism of corporate law. By allowing companies to reward their employees through equity, not only promotes employee retention but also ensures a symbiotic relationship between the company and its workforce. As businesses continue to evolve, Sweat Equity remains a valuable tool for nurturing talent, fostering loyalty, and driving long-term success. Understanding its nuances and complying with the legal framework is essential for companies aiming to leverage this innovative approach to human resource management.