This article has been written by Ms. Saina Parveen, a CS Executive level Student from the Institute of Company Secretary of India (ICSI)

INTRODUCTION

1. Section 2(88) of the Companies Act,2013 defines “sweat equity shares” as such equity shares as are issued by a company to its directors and 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 made by such directors and employees to the company.
2. Sweat equity shares are one of those modes of making share-based payments to employees of the company.
3. The issue of sweat equity shares allows the company to retain employees by rewarding them for their services. Sweat equity shares reward the beneficiaries by giving them incentives in lieu of their contribution towards the development of the company. Sweat equity shares enable greater employee stake and interest in the growth of an organization as it encourages the employees to contribute more towards the company in which they feel they have a stake.
4. Section 53 of the Companies Act,2013 prohibits issuing shares at a discount but in the case of sweat equity shares the exception is provided in favor of the directors and employees of the company to encourage work done by them. They comply with all the regulations along with rules, regulations and work on behalf of the company. Hence, it’s important to appreciate the work of the directors and employees. 
5. Preferential Issue is excluded from the definition of Sweat Equity Shares. Hence, preferential offerings are also excluded as per Rule 8(13) of the Companies (Share Capital and Debentures) Rules,2014.
6. The regulation of sweat equity shares shall not apply to unlisted companies, but the company coming out with the initial public offering and seeking listing of its securities on the stock exchange, pursuant to the issue of sweat equity shares, shall comply with the SEBI (Issue of Capital and Disclosure Requirement) Regulations,2018. 
7. Any acquisition of sweat equity shares shall be subject to the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,2011. 

Conditions for issuances of sweat equity shares are:

As per Section 54 of the Companies Act,2013, a company may issue sweat equity shares with the following conditions namely:

1. The issue is authorized by the Special Resolution passed in the General Meeting of the company,
2. The issue shall specify the number of shares, current market capital price, and particulars of directors and employees to whom the sweat equity shares are to be issued.
3. If the equity shares of the company are listed on the recognized stock exchange, then such company shall also comply with the SEBI regulations for those shares issued to directors or employees.

While passing Special Resolution following matters will be disclosed, namely:

The Board of Directors at the time of passing the special resolution of Section 54 of the Companies Act,2013 shall contain the following information which the shareholders consider are:

1. The total number of shares issued as sweat equity shares.
2. Current market price of the shares of the company.
3. The value of intellectual property rights or technical know-how and other value received from the employees or directors with the valuation report or on the basis of the valuation report.
4. Name of the employees and directors along with their relationship with the company.
5. The consideration paid for the sweat equity shares.
6. The price at which the sweat equity share shall be issued.
7. Ceiling on managerial remuneration, which affects the issuance of such sweat equity shares.
8. The statement that shows that the company has followed proper accounting policies as specified by the SEBI.
9. Calculation of EPS pursuant to the issue of securities specified by the CA.
10. If the sweat equity share is issued to the promoter or the promoter group of the company then, such promoter or promoter group shall not be part of the General Meeting in which sweat equity is issued to him along with the directors and employees of the Company.
11. Such resolution shall be valid for the period of 12 months from the date of passing the resolutions, and the explanatory statement shall contain the details as per the Schedule.
12. The valuation of the intellectual property and technical know-how and other value addition shall be done by the Merchant Banker.
13. The merchant banker can consult with an expert and also contain a certificate from CA with the relevant accounting standards.

Definition of the employee in relation to issue of sweat equity shares 

The term ‘employee’ means, 

1. An employee of the company working in India or abroad; or
2. A director of the company whether a whole time or not.

Maximum sweat equity allowed in the Company:

A company shall issue sweat equity shares from its existing paid-up share capital is not more than 15%, in a year.

However, the issuance can be increased but is restricted to 25% of the paid-up share capital at any time.

A company that is listed on the Innovation Growth Platform shall issue a minimum of 15% but is restricted to 50% of the paid-up share capital of the company up to 10 years of its incorporation.

Pricing of Sweat Equity Shares is as follows:  

The pricing of sweat equity shares is higher of the following:

1. The average of the weekly high and low of the closing prices, during the last six months preceding the relevant date; or
2.  The average of the weekly high and low of the closing prices, during the two weeks preceding the relevant date; or
3.   If the shares are listed on more than one stock exchange, but quoted only on one stock exchange on a given date, then the price on the stock exchange shall be considered.
4. If the share price is quoted on more than one stock exchange, then the stock exchange where there is the highest trading volume during that date shall be considered.
5.   If the shares are not quoted on the given date, then the share price on the next trading day shall be considered.

Lock-in of the Sweat Equity Share: 

The Sweat Equity Shares shall be locked in for three years from the date of allotment, if the Shares are issued pursuant to SEBI (Issue of Capital and Disclosure Requirement) Regulation, 2018 then the promoter lock-in will be considered according to the ICDR regulations.

Ceiling limit on Managerial Remuneration:

The amount of sweat equity shares issued shall be as part of the managerial remuneration for the purposes of Section 197 of the Companies Act, 2013 if the following conditions are fulfilled:

1. The Sweat Equity Shares are issued to any director or manager; and 
2. They are issued for non-cash consideration, which does not include any assets of the company which can be carried to the balance sheet in accordance with the relevant accounting standards.

Report of the Auditors placing before the Annual General Meeting

The Board of Directors in the general meeting place to the shareholders the auditor’s certificate which shows the fact that the company complies all the regulations in accordance with the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations,2021.