What Are Sweat Equity Shares? - Meaning & Other Details | My Espresso

Sweat Equity Shares: Here's All You Need to Know

Employees play an important role in the growth and development of a company. They are a driving force that keeps the company going. The efforts and diligence of employees is the key component for the expansion and success of a business.

Published on 23 March 2023

Companies also tend to show their appreciation for their outstanding employees through various rewards. These rewards act as a method of appreciation and are a source of motivation for the employees to further improve the operations and take the company to new heights.

One of the ways companies appreciate their employees is by providing them with sweat equity shares. These are rewards that the company gives to the employees as a mark of recognition for the hard work that the employee has put in for the company.

Now, let us understand sweat equity shares meaning in detail.

 What are Sweat Equity Shares?

These are the shares of the company that the company offers the employees as a reward or appreciation for the employee’s exceptional contribution. Sweat equity shares are a part of the profit of the company. The company invests in employees, and the contribution of the employees towards the company’s success is a return on this investment. Similarly, the employees put in hard work and dedication for the company, and these shares are a return on investment for them.

Now that you understand the sweat equity meaning, here is all the other information in detail.

Why are Sweat Equity Shares Provided?

According to the Companies Act, Section 2, of 2013, sweat equity shares mean the shares that the company gives to certain  employees for the following reasons:

  • The employee has contributed exceptionally to the execution and completion of a certain project.
  • The employee has exhibited technical knowledge and prowess in a certain field of work.
  • The employee has provided value addition to the company by contributing outstandingly to gain intellectual rights to a property.

Category of Employees to Whom Sweat Equity Shares are Issued

The category of employees to whom sweat equity shares are issued include:

  • Someone who is a permanent employee of the company, whether working outside India or in India
  • Someone who is the Director of the company (can be a full-time Director or not)
  • Director or employee as stated above of a subsidiary company in India or outside India or Holding company of the company

Laws Governing the Issue of Shares by Companies

The issuance of sweat equity shares is regulated as per the Companies Act, 2013 and Companies Act, 1956.

  • Unlisted company: In this case, the entity has to follow Section 54 alongside The Companies (Share Capital and Debentures) Rules, 2014.
  • Listed company: Besides the Companies Act, 2013, the listed companies have to follow the rules and regulations laid down by the Securities and Exchange Board of India (SEBI).

Important Points Regarding the Issue of Sweat Equity Shares

  • The sweat equity shares carry a mandatory lock-in period of 3 years, and these are non-transferable shares.
  • The sweat equity shares are given to the employees at a discounted price. Most employees prefer these shares over ESOPs as they give the employees a right to buy rather than making it an obligation for the employees to buy the shares at the predetermined price.
  • The evaluation and decision regarding the fair price of these shares are made by a registered valuer. This helps the company offer rewards to the employees without incurring any financial outgo.
  • These shares are offered by the company to employees at the beginning of the stage of growth. This ensures that the employees also grow with the company and also have a stake in the company’s success and development.

How Many Sweat Equity Shares Can be Issued by the Company?

There are a few conditions that govern the value of sweat equity shares that a company can issue:

  • The company can issue a higher of 15% of the paid-up capital of the company or ₹5 crores.
  • The value of the sweat equity shares should not be more than 25% of the paid-up capital of the issuing company at any given time.
  • In the case of start-ups, the issuance of sweat equity shares can happen up to a maximum of 50% of their paid-up capital within 5 years of the date of incorporation or registration of the company.

To Sum it Up

Thus, sweat equity shares are provided by the company to the directors or employees who have contributed remarkably to the growth of the company. These are issued when the employee has provided technical know-how, secured intellectual property rights, or has added value to the company.

Chandresh Khona

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