SWEAT EQUITY SHARES UNDER COMPANIES ACT 2013
Under the Companies Act, 2013 (“Act”), there are limited ways in which dedicated
employees of the company can be rewarded or remunerated by issue of shares. One of
the ways of rewarding or remunerating such employees is issue of sweat equity shares by
the company.
Section 2(88) of the Act defines “sweat equity shares” as equity shares issued by a
company to its directors or employees at a discount or for consideration, other than cash,
for providing their know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called. In the definition of sweat
equity, there is a reference to the expression “value additions”.
It 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 employee.
It is interesting to note that the rights, limitations, restrictions applicable to equity shares shall
be applicable to the sweat equity shares. The holders of sweat equity shares shall rank pari
passu with other equity shareholders.
The following are the checklist for private companies and unlisted public companies for the
issue of sweat equity shares under the Act and the Rules made thereunder. The listed
companies shall comply with the SEBI (Securities and Exchange Board of India)
Regulations in addition to the provisions of the Act.
1. Meaning “Employee” and “Director” for Issue of Sweat Equity Shares-
According to the provisions of the Companies (Share, Capital and Debentures) Rules,
2014, a company can issue sweat equity shares to its directors or employees, which means:
(i) Permanent employee of the company who has been working in India or outside India; or
(ii) director of the company, whether a whole-time director or not; or
(iii) employee or a director of the subsidiary company, in India or outside India; and
(iv) employee or a director of the holding company;
Therefore, the company shall ensure that the sweat equity shares are offered and allotted to an
employee (as defined above) or directors and such employee provides know-how or makes
available rights in the nature of intellectual property rights or value additions.
2. Valuation-
The sweat equity shares to be issued shall be valued at a price determined by a registered valuer
as the fair price giving justification for such valuation.
The valuation of intellectual property rights or of know how or value additions for which sweat
equity shares are to be issued, shall be carried out by a registered valuer.
3. Limit on Issue of Sweat Equity Shares-
The company shall not 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.
However, the issuance of sweat equity shares in the company shall not exceed 25% of the paid-
up equity capital of the company at any time.
However, a startup company may issue sweat equity shares not exceeding 50% of it’s paid up
capital upto 5 years from the date of its incorporation.
4. Lock-in for Sweat Equity Shares-
The sweat equity shares issued to directors or employees shall be locked-in i.e. non
transferable for a period of 3 years from the date of allotment.
5. Approval of the Board of Directors and Shareholders
According to the amendment introduced by the Companies (Amendment) Act, 2017, the
company can issue sweat equity shares even when it has not commenced its business. A
company can issue sweat equity shares to its employees or directors after obtaining the
approval shareholders by passing a special resolution. Therefore, in such cases, the Board of
Directors shall accord it’s in principle approval for such issue.
After obtaining the approval of the directors, the company shall obtain shareholders’ approval
by passing a special resolution. A copy of gist along with critical elements of the valuation
report shall be sent to the shareholders along with the notice of the general meeting.
The explanatory statement to be annexed to the notice of general meeting shall contain the
particular prescribed under the Companies (Share Capital and Debentures) Rules, 2014. The
company shall file e-Form MGT-14 with the Registrar of Companies along with the fee as
specified in the Companies (Registration Offices and Fees) Rules, 2014.
The special resolution authorising the issue of sweat equity shares shall be valid for
making the allotment within a period of not more than 12 months from the date of passing
of the special resolution.
6. Post-Allotment Compliances-
After allotment of sweat equity shares, the company shall, within 30 days thereafter, file with
the Registrar a return of allotment in e-Form PAS-3, along with the fee as specified in the
Companies (Registration Offices and Fees) Rules, 2014. The company shall issue share
certificates within 2 months from the date of allotment. The fact that the share certificates
are under lock-in and the period of expiry of lock-in shall be stamped in bold or
mentioned in any other prominent manner on the share certificate.
After allotment of sweat equity shares, the company secretary of the company or any other
authorised person by the Board of Directors shall make necessary entries in the register of
members within 7 days from the date of allotment.
7. Maintenance of Register of Sweat Equity Shares-
The company shall also maintain Register of Sweat Equity Shares in a prescribed form (Form
No. SH-3) and shall forthwith enter therein the particulars of sweat equity shares issued. The
Register of Sweat Equity Shares shall be maintained at the registered office of the company or
such other place as the Board of Directors may decide. The entries in the register shall be
authenticated by the company secretary of the company or by any other person authorised by
the Board of Directors for the purpose.
