The article has been written by Mr. Rishi Kumar Yadav, is a law graduate from University college of Law (MLSU), Udaipur, Rajasthan.

Abstract: 

Section 2(88) of the Companies Act, 2013 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 intellectual property rights or value additions by whatever name called.

Introduction:

The Issue of Sweat Equity Shares is a common practice among companies that want to incentivize their employees and retain key talent. Sweat equity shares refer to shares issued by a company to its employees at a discounted price or for consideration other than cash. The Companies Act, 2013 regulates the issuance of sweat equity shares by companies in India. In this article, we’ll take a closer look at the issue of sweat equity shares under the Companies Act, 2013

What are Sweat Equity Shares:

Sweat equity shares are a type of equity shares issued by a company to its employees in recognition of their contribution to the company’s growth and success. Sweat equity shares are issued at a discount or for consideration other than cash. The discount on the issue of sweat equity shares cannot exceed 15% of the current market price of the shares or the price as per SEBI guidelines, whichever is higher.

Who are Eligible for Sweat Equity Shares:

1. Permanent employee of the company, those who are working in India or outside India (from last one year).
2. Permanent employee of the subsidiary of the company or of a holding company of the company,
3. Director of the company (full time).

Which companies can issue sweat equity shares:

1. One person company
2. Public Company
3. Private Company
4. Listed/Unlisted company

Exempation:

In case of a specified IFSC private company clause (c) of sub section (1) shall not apply vide notification no.G.S.R 9 (E). DATED 4TH January, 2017

In case of a specifird IFSC public company clause (c) of sun section (1) shall not apply vide notification no G.S.R.08 (E). dated 04th January,2017

(d) Where the equity shares of the company are listed on a recognized stock exchange, the sweat equity share are issued in accordance with the regulations made by the securities and Exchange Board in this behalf and if they are not so listied, the sweat equity shares are issued in accordance with such rules as may be prescribed.

Features of Sweat Equity Shares

Sweat equity shares have the following features:

• Issued to employees, directors, or consultants who have contributed to the growth and development of the company.
• Issued at a discounted price or for no consideration.
• Can only be issued after the company has been incorporated for at least one year.
• Cannot be issued for more than 15% of the existing paid-up share capital of the company.
• Cannot be issued for more than Rs. 5 crores in a financial year.
• Cannot be transferred or sold for a period of three years from the date of issue.
• Must be held for a minimum period of three years from the date of issue.

Conditions for Issuing Sweat Equity Shares:

The issue of sweat equity shares is subject to certain conditions laid down by the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) regulations. Some of the conditions for issuing sweat equity shares are:

• Approval of the shareholders: The issue of sweat equity shares must be approved by the shareholders of the company by way of a special resolution passed at a general meeting.
• Limit on issue: The total number of sweat equity shares issued by a company cannot exceed 15% of the paid-up share capital of the company at any time.
• Lock-in period: The sweat equity shares issued by a company must be locked-in for a minimum period of three years from the date of allotment.
• Valuation: The valuation of the sweat equity shares must be done by a registered valuer as per the guidelines laid down by SEBI.
• Eligibility criteria: The employees eligible for the issue of sweat equity shares must have contributed to the growth and success of the company in a significant manner.
• Disclosure requirements: The Company must make adequate disclosure regarding the issue of sweat equity shares in its annual report and on its website.

Advantages of Sweat Equity Shares:

Sweat equity shares have several advantages for both the company and the employees, directors, or consultants who receive them. These advantages are:

• Helps in attracting and retaining talent: Sweat equity shares are a great way to attract and retain talented employees, directors, or consultants who are instrumental in the growth and development of the company.
• Cost-effective way of compensation: Sweat equity shares are a cost-effective way of compensating employees, directors, or consultants. They do not require cash outflow from the company and are issued at a discounted price or for no consideration.
• Aligns the interests of the employees with those of the company: Sweat equity shares align the interests of the employees, directors, or consultants with those of the company. This encourages them to work towards the growth and development of the company
• Increases shareholder value: Sweat equity shares increase the value of the company for its shareholders. This is because the employees, directors, or consultants who receive sweat equity shares have a vested interest in the success of the company.

Drawbacks of Issuing Sweat Equity Shares:

The following are the drawbacks of issuing sweat equity shares:

• Dilution of Ownership: Issuing sweat equity shares can dilute the ownership of existing shareholders, which can affect their control over the company.
• Accounting Complexities: Issuing sweat equity shares can lead to accounting complexities, as the value of the sweat equity shares needs to be determined and recorded accurately in the company’s financial statements.
• Legal and Regulatory Compliance: Issuing sweat equity shares requires compliance with various legal and regulatory requirements, which can be time-consuming and expensive.
• Misuse of Sweat Equity: There is a risk that sweats equity shares may be misused by employees, who may not contribute as much to the company’s growth and success as expected.

Procedure for Issue of Sweat Equity Shares:

The procedure for the issue of sweat equity shares is as follows:

• The company must pass a special resolution authorizing the issue of sweat equity shares.
• The company must obtain a valuation report from a registered valuer.
• The company must make an application to the Registrar of Companies (ROC) within 30 days of the issue of sweat equity shares.
• The ROC must be provided with the valuation report, details of the employees to whom the shares are being issued, and the terms and conditions of the issue.
• The ROC will scrutinize the application and if satisfied, will approve the issue of sweat equity shares.
• The company must issue the sweat equity shares within 12 months of receiving approval from the ROC.

Important points to be kept in mind regarding the Issue of Sweat Equity Shares:

• Eligibility Criteria: Only employees, directors or key managerial personnel who have contributed towards the growth and development of the company are eligible for the issue of sweat equity shares.
• Maximum Limit: The maximum limit for the issue of sweat equity shares is 15% of the paid-up share capital of the company in a year or up to Rs. 5 crores, whichever is higher.
• Valuation: The valuation of sweat equity shares should be done by a registered valuer as per the guidelines of the Securities and Exchange Board of India (SEBI).
• Lock-in Period: Sweat equity shares are subject to a lock-in period of three years from the date of allotment.
• Restrictions on Transfer: Sweat equity shares cannot be transferred, sold or pledged until the completion of the lock-in period.
• Disclosure Requirements: Companies are required to disclose the details of the issue of sweat equity shares in their annual report and on their website.
• Compliance: Companies must comply with the provisions of the Companies Act, 2013 and the SEBI guidelines while issuing sweat equity shares.

Conclusion:

In conclusion, the issue of sweat equity shares is a useful tool for companies to reward and retain talented employees. The issue of sweat equity shares is subject to certain conditions laid down by the Companies Act, 2013, and the SEBI regulations. The issue of sweat equity shares must be approved by the shareholders of the company, and the total number of sweat equity shares issued cannot exceed 15% of the paid-up share capital of the company at any time. The sweat equity shares issued by a company must be locked-in for a minimum period of three years from the date of allotment. The issue of sweat equity shares has several advantages for companies, such as incentivizing employees to work towards the long-term growth of the company and promoting a sense of ownership among the employees.

Case Laws on Issuance of Equity Shares:

1. Union of India – Section 2 in The Income Tax Act,1961
2. Needle Industries (India) Ltd., & Ors vs Needle Industries Newey (India) … on 7 May, 1981
3. Sangramsinh P. Gaekwad & Ors vs Shantadevi P. Gaekwad (Dead)Thr.Lrs. & … on 20 January, 2005
4. Shanti Prasad Jain vs Kalinga Tubes Ltd. on 14 January, 1965
5. Commissioner Of Income-Tax, Bihar vs Dalmia Investment Co. Ltd on 13 March, 1964

References:

• https://www.legalwindow.in/issue-of-sweat-equity-shares-under-companies-act/

• https://corporatelawreporter.com/companies_act/section-54-of-companies-act-2013-issue-of-sweat-equity-shares/

• https://www.google.com/search?q=SEBI+Regulations+for+equity+shares&sca_esv=b01ed0ac0a141652&sxsrf=ACQVn0_x38dG0diMPtM32GkBDArGeGd-xA%3A1709189525715&source=hp&ei=lSngZYmBJfGK2roP49GPkAw&iflsig=ANes7DEAAAAAZeA3pVzdZD0s9zyXbfJ9QYQ4_oFIAySC&ved=0ahUKEwjJn5yU-8-EAxVxhVYBHePoA8IQ4dUDCBY&uact=5&oq=SEBI+Regulations+for+equity+shares&gs_lp=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&sclient=gws-wiz

• https://ca2013.com/rule-8-companies-share-capital-and-debentures-rules-2014/