Awarding or appreciating your employees is one of the ways that companies usually follow to retain their employees and get the best out of their talent. Sweat Equity share is one such way used by the company where the company makes the share-based payment to its employees at a discount or for consideration other than cash. It is a reward given to the employees for their contribution to the development of the company.
A company can issue its shares to the employees. This provides an incentive for the employees to contribute better to the company and motivate them. It also helps to retain the employees in the company for the long term. The employees are the key factor for the success of the company. Their efforts can be compensated by way of issuing shares to them.
What are Sweat Equity Shares?
As per Sweat Equity Shares under Companies Act, 2013, Sweat Equity Shares are equity shares issued by a corporation to a director or staff at a reduced rate or for a consideration other than cash in exchange for delivering technical expertise or allocating assets such as intellectual property or quality enhancement.
Sweat equity shares are a type of equity shares issued by a company to its employees in recognition of their contribution to the company’s growth and success. Sweat equity shares are issued at a discount or for consideration other than cash. The discount on the issue of sweat equity shares cannot exceed 15% of the current market price of the shares or the price as per SEBI guidelines, whichever is higher.
Features of Sweat Equity Shares
Non-Monetary Contributions Matter: Unlike regular shares that dance to the tune of currency, Sweat Equity Shares groove to a different rhythm. They recognize the value of non-monetary contributions – your toil, your ideas, your innovations.
Employees Take Center Stage: Typically, these shares are doled out to employees, aligning their interests with the company’s success. It’s a mutual pact where the more the company flourishes, the more the sweat equity holder stands to gain.
Locked and Loaded for a Vesting Period: Sweat Equity Shares often come with a vesting period. It’s like a gestation period for your efforts – they need time to mature, and only then can you fully savor the fruits of your labor.
Conditions for Issuing Sweat Equity Shares
- Approval of the shareholders: The issue of sweat equity shares must be approved by the shareholders of the company by way of a special resolution passed at a general meeting.
- Limit on issue: The total number of sweat equity shares issued by a company cannot exceed 15% of the paid-up share capital of the company at any time.
- Lock-in period: The sweat equity shares issued by a company must be locked-in for a minimum period of three years from the date of allotment.
- Valuation: The valuation of the sweat equity shares must be done by a registered valuer as per the guidelines laid down by SEBI.
- Eligibility criteria: The employees eligible for the issue of sweat equity shares must have contributed to the growth and success of the company in a significant manner.
- Disclosure requirements: The Company must make adequate disclosure regarding the issue of sweat equity shares in its annual report and on its website.
Advantages of Sweat Equity Shares
- Helps in attracting and retaining talent: Sweat equity shares are a great way to attract and retain talented employees, directors, or consultants who are instrumental in the growth and development of the company.
- Cost-effective way of compensation: Sweat equity shares are a cost-effective way of compensating employees, directors, or consultants. They do not require cash outflow from the company and are issued at a discounted price or for no consideration.
- Aligns the interests of the employees with those of the company: Sweat equity shares align the interests of the employees, directors, or consultants with those of the company. This encourages them to work towards the growth and development of the company
- Increases shareholder value: Sweat equity shares increase the value of the company for its shareholders. This is because the employees, directors, or consultants who receive sweat equity shares have a vested interest in the success of the company.
Procedure for Issue of Sweat Equity Shares
- The company must pass a special resolution authorizing the issue of sweat equity shares.
- The company must obtain a valuation report from a registered valuer.
- The company must make an application to the Registrar of Companies (ROC) within 30 days of the issue of sweat equity shares.
- The ROC must be provided with the valuation report, details of the employees to whom the shares are being issued, and the terms and conditions of the issue.
- The ROC will scrutinize the application and if satisfied, will approve the issue of sweat equity shares.
- The company must issue the sweat equity shares within 12 months of receiving approval from the ROC.
Drawbacks of Issuing Sweat Equity Shares
- Dilution of Ownership: Issuing sweat equity shares can dilute the ownership of existing shareholders, which can affect their control over the company.
- Accounting Complexities: Issuing sweat equity shares can lead to accounting complexities, as the value of the sweat equity shares needs to be determined and recorded accurately in the company’s financial statements.
- Legal and Regulatory Compliance: Issuing sweat equity shares requires compliance with various legal and regulatory requirements, which can be time-consuming and expensive.
Important points to be kept in mind regarding the Issue of Sweat Equity Shares
- Eligibility Criteria: Only employees, directors or key managerial personnel who have contributed towards the growth and development of the company are eligible for the issue of sweat equity shares.
- Maximum Limit: The maximum limit for the issue of sweat equity shares is 15% of the paid-up share capital of the company in a year or up to Rs. 5 crores, whichever is higher.
- Valuation: The valuation of sweat equity shares should be done by a registered valuer as per the guidelines of the Securities and Exchange Board of India (SEBI).
- Lock-in Period: Sweat equity shares are subject to a lock-in period of three years from the date of allotment.
- Restrictions on Transfer: Sweat equity shares cannot be transferred, sold or pledged until the completion of the lock-in period.
FAQS
Q: What happens if an employee with Sweat Equity Shares decides to leave?
Exiting this arrangement isn’t as simple as handing in a resignation letter. Negotiations may be required, and the process can be complex.
Q: How much can I offer as Sweat Equity?
The Companies Act, 2013 puts a cap on the percentage of the company’s paid-up equity capital that can be offered as sweat equity. This limit is something you need to be mindful of during the issuance.
Q: What exactly are Sweat Equity Shares?
Sweat Equity Shares are a unique breed of shares that recognize non-monetary contributions, such as effort, ideas, and skills, to a company. They are typically issued to employees.
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