Issue of Sweat Equity Shares Under Companies Act, 2013

Sweat Equity shares means such equity shares which are issued by a company only to its employees, directors at a discount or for consideration other than cash. Now , you may wonder why such shares are issued at a discount and that too to its existing employees and directors. In simple words we can say that this is a reward given to them for their effort towards the company i.e. for providing their technical know-how or for creating valuable intellectual property rights or for value addition, by whatever name it may be called.

a permanent employee of the company who has been working in India or outside for at least last one year ,or
a director of the company ,whether a whole time director or not or
an employee or a director of the company ,as defined in sub-clauses(a) or (b)above of a subsidiary India or outside India ,or of a holding company of the company.

Value Additions means actual or anticipated economic benefits that has been derived or will be derived by the company from an expert/professional for providing know-how, adding value to the company or making available rights in the nature of intellectual property rights.

Purpose Of Issuing Sweat Equity Shares

It is given in recognition of the effort taken by the employee and the directors.
Employees are given options to buy shares of the company so they become owners of the company partly and participate in the profits of the company apart from the salary.
It is a device used to retain the best talent of the company. It is given as a part of the remuneration package.

Restrictions On The Issue Of Sweat Equity Shares

A company can issue sweat equity shares if the following conditions are fulfilled:

The issue of sweat equity shares ought to be authorized by a special resolution passed by the company in a general meeting. The resolution must specify the number of shares, current market price of the shares, consideration, if any, and the section of directors or employees to whom they are to be issued .
The special resolution authorizing 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.
Sweat equity shares which are going to be issued must be valued at a price determined by a registered valuer.
As on the date of issue, an year should have passed since the company was entitled to commence business.
The company needs to maintain a Register of Sweat Equity Shares in Form No SH.3 at the Registered Office of the company or any other place as the Board may decide.
The entries in the register shall be checked by the company secretary of the company or any other person authorized by the Board.
The sweat equity shares of a company whose equity shares are listed on a recognized stock exchange must be issued in accordance with the guidelines prescribed by the Securities and Exchange Board of India (SEBI).
In the case of unlisted companies, a company whose equity shares are not listed on any recognized stock exchange or unlisted shares, sweat equity shares can be issued by passing a special resolution in general meeting.
The sweat equity shares is subject to a lock in period of 3 years and this fact needs to be stated boldly on the face of the share certificates.
The company cannot issue sweat equity shares for more than 15% of the existing paid up equity share capital in a year or shares of the issue value of Rs. 5 crores, whichever is higher. At any time, the issuance of sweat equity shares in the Company shall not exceed 25% of the paid up equity capital of the Company.
Companies Act lays down conditions for the issue of sweat equity shares. For listed companies, there are regulations made by the SEBI. The SEBI also prescribes the accounting treatment of sweat equity shares.
For consideration other than cash, the company should also give justification or a reason for the issue of sweat equity shares , which should form a part of the notice sent for the general meeting.
The decision of the BOD to issue sweat equity has to be finalized or approved by passing a special resolution at a shareholders’ meeting later in the year. The special resolution ought to be passed by 75 percent votes.