scorecardresearchWhat are sweat equity shares? All you need to know
Sweat equity shares are a way for a firm to recognise the efforts of an employee and reward them.

What are sweat equity shares? All you need to know

Updated: 17 Jan 2022, 11:54 AM IST
TL;DR.
Sweat equity shares are a way for a firm to recognise the efforts of an employee and reward them. It helps the employees as well to stick to their company for a longer duration. Let’s look at the key things to know about these shares

There are many ways through which a company shows appreciation for its employees and rewards them. Such rewards provide an incentive for the employees and motivate them to work longer with the firm. One such way is issuing shares for them. There are two ways employers issue shares for employees - Employees Stock Option Scheme (ESOP) and Sweat Equity Shares. 

Let's find out more about sweat equity shares

These shares are generally a reward for the hard effort put in by employees. These are the shares employees get which are a part of the firm's profit. They use it to attract talent, retain staff and reward them for their exemplary work.

As per Section 2 of the Companies Act, of 2013, sweat equity shares is defined as equity shares that are issued by the 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.

It can be offered by the company for certain reasons:

Remarkable contribution and efforts of an employee or a director in completion of any project

Technical expertise in the field

Value addition to the company through extraordinary contribution and gaining intellectual property rights

The issuing of sweat equity shares is regulated by the Companies Act, 1956 as well as the Companies Act, 2013. If an unlisted company issues sweat shares, it has to follow Section 54, while in the case of a listed company, it has to comply with provisions of market regulator Sebi along with the Companies Act, 2013.

Who can get sweat shares: Anyone who is a permanent employee of a firm whether in India or abroad can get sweat shares. The employee is defined in the Company’s Act as:

A person who is working on a permanent position in the company in or from outside of India for at least a year, OR

A director of the company, irrespective of being a whole-time director or not, OR

An employee or a director as defined above of the entity’s holding or subsidiary company in or outside India.

Understanding sweat equity shares
Understanding sweat equity shares

Quantum of issue of Sweat Equity Shares

The Company shall not issue Sweat Equity Shares for more than 15 percent of existing paid-up share capital or issue value of shares 5 crore, whichever is higher.

For lifetime: The Company shall not issue Sweat Equity shares for more than 25 percent of the paid-up Equity Capital at any time. For start-ups, the limit for Sweat Equity Shares issuance is 50 percent of its paid-up capital up to 5 years from the date of its incorporation or registration.

A share certificate has to be issued within 2 months of allotment to the employees. The shares have to be allocated within 12 months of passing the resolution for the issuance.

A valuer is authorized who decide the fair price of sweat equity shares.

Lock-in Period

Sweat equity shares are non-transferable and have a lock-in period of 3 years from the date of allotment. The share certificate, which employees receive must also specify the same. After the expiration of the lock-in period, the share certificate will have to mention that it has expired.

Disclosures

After allotting sweat shares, the firm has to disclose who it has been allotted to and the reason for allotment. Also, the number of shares that have been given and the terms and conditions of the sweat equity. Percentage of sweat equity shares of the total equity post issue and paid-up share capital also have to be disclosed. Finally, the firm must share the diluted EPS in respect of the issue of sweat equity shares.

Sweat equity shares are a way for a firm to recognise the efforts of an employee and reward them. It helps the employees as well to stick to their company for a longer duration. It also negated the need to offer a raise to employees in case of a cash flow issue. It is not only beneficial for employees but for employers as well.