Sweat equity shares are issued by a company to its employees or directors at a discount or for a consideration other than cash. It gives the company directors or employees ownership and equity upside in the company. The idea is to compensate individuals for their efforts and contributions with ownership stakes in the company.
Sweat Equity Shares
Sweat equity shares can only be issued by a company to its Directors or Employees, at a discount or for a consideration other than cash, for their providing of know-how or creation of intellectual property rights like trademark, patent, copyright or value additions. Sweat equity shares can be issued to:
- Permanent employee of the company who has been working in India or outside India, for atleast the last one year;
- Director of the company, whether a whole time Director or not;
- Employee or Director above of a subsidiary of the company, in India or outside india, or of a holding company of the company.
Sweat equity shares are issued for value additions of the Director or Employee. Value additions mean actual or anticipated economic benefits derived or to be derived by the Company from an Expert or Professional from providing know-how or making available rights in the nature of intellectual property rights. For sweat equity shares to be issued, the employee’s renumeration for value addition should not have been paid or included in the normal remuneration payable, under the contract of employment or monetary consideration payable under any other contract.
How are Sweat Equity Shares issued in India?
In India, sweat equity shares are issued according to the Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014. For listed companies, the Securities Exchange Board has laid down the rules regarding the issuance of these shares.
Unlike ESOPs, the sweat equity shares are allocated immediately. Sweat equity shares are generally given to the employees or directors for their:
1. Extraordinary contribution and hard work in the completion of a project.
2. Technical know-how or expertise in an area of the business.
3. Value addition made to the company or contribution towards gaining intellectual property rights.
Procedure for Issuing Sweat Equity Shares
Sweat equity shares issued by a company belong to a class of shares already issued by the company. Hence, the rights, limitations, restrictions and provisions which are applicable to equity shares are applicable to sweat equity shares and the holders of sweat equity shares rank pari passu with other equity shareholders.
Issue of sweat equity shares must be authorised by a special resolution passed by the company. The resolution must specify the number of shares, the current market price, consideration and the class or classes of Directors and employees to whom such equity shares are to be issued.
The following explanatory statements need to be attached to the notice of meeting for passing special resolution:
- Date of Board meeting at which the proposal for issue of sweat equity shares was approved;
- The reason or justification for the issue;
- The class of shares under which sweat equity shares are intended to be issued;
- The total number of shares to be issued as sweat equity;
- The class or classes of Directors or employees to whom such equity shares are to be issued;
- Principal terms and conditions on which sweat equity shares are to be issued, including basis of valuation;
- Time period of association of such person with the company;
- The name and details of the Directors or Employees to whom the sweat equity shares will be issued and their relationship to Promoters / Key Managerial personnel of the company;
- Price at which sweat equity shares are proposed to be issued;
- Consideration including consideration other than cash, if any to be received for the sweat equity;
- Details of ceiling on managerial renumeration, if any, be breached by issuance of such sweat equity and how is it proposed to be dealt with;
- Statement to the effect that the company shall conform to the applicable accounting standards;
- Diluted earnings per share pursuant to the issue of sweat equity securities, calculated in accordance with the applicable accounting standards;
FAQs
What are the benefits of Sweat Equity Shares?
The key benefits of sweat equity for companies are:
1. Saves cash: Offering sweat equity as a reward saves cash for the issuing company. It is beneficial for cash-strapped businesses; offering equity as compensation reduces the cash expenses.
2. Provide Upside & Retain employees: Sweat equity creates a generous reward for the employees and makes them feel valued. It imbibes a sense of ownership and responsibility in them, helping to retain talent for the company.
Who is eligible to receive Sweat Equity Shares?
The followings are eligible to get sweat equity shares:
1. Permanent employee of the company who is working with the company for at least 1 year in India or abroad.
2. Permanent employee of the subsidiary company or a holding company working either in India or abroad for at least 1 year.
3. Directors of the company (independent directors are not eligible).
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