Compliances

A Complete Analysis of Sweat Equity Shares

calendar04 Apr, 2023
timeReading Time: 4 Minutes
A Complete Analysis of Sweat Equity Shares

Sweat Equity Shares are those that a company issues to its directors or employees at a discount or for consideration other than cash in exchange for their knowledge or for providing rights in the form of intellectual property rights or value additions, regardless of what they are called, according to Section 2(88) of the Act.

Prospects of Sweat Equity Shares

  • Offering employees sweat equity shares as a thank you for their dedication and hard work is a terrific idea. Such appreciation encourages employees to stay with the organization for a longer period of time.
  • Since monetary bonuses and other forms of financial motivation are not feasible for the vast majority of firms, different forms of incentive must be provided. Sweat equity shares are distributed to employees in multiples of 2 to 5. This comprises both new and existing businesses.
  • These might be used to compensate for any reductions in compensation that employees are required to accept. Directors and workers of certain firms may agree to accept a lower wage in exchange for an ownership stake.

Why do Companies Offer Sweat Equity Shares?

  • The primary objective of these perks is to improve both the rate of staff recruitment and employee retention. It is desirable to issue these shares at the outset, when the company’s future growth is unpredictable. Employees who possess such shares have the ability to vote and earn dividends, which gives them a feeling of ownership. Take note that these shares cannot be transferred and have a lock-in period of three years. Because of this, the strategy is effective in a number of different ways.
  • The corporation may award sweat equity shares to directors that go above and above to further the company’s objectives. Such directors may be compensated with sweat equity in order to recognize their accomplishments and keep them dedicated to the post for the foreseeable future.
  • Discounted shares are referred to as Sweat Equity. This element of owning shares is often chosen over ESOPs (Employee Stock Option Plans), which provide employees the possibility but not the duty to acquire a certain number of shares of the firm at a future price that is based on the volatility of the share price.

Who Has Access to Sweat Equity Shares?

  • According to Section 2(88) of the Companies Act of 2013[1], this plan includes directors and employees. According to Rule 8(1) of the Companies (Share Capital and Debentures) Rules, 2014, a person is considered a “Employee” if they have worked for the company permanently or for at least a year outside of India, are a director of the company, regardless of whether they are employed full-time, or are an employee or director of the Holding Company or a subsidiary of the entity, whether they are based in India or elsewhere.

Recipient Restrictions

  • Sweat equity shares may only be given to permanent workers who have worked for the company for at least a year, whether in India or abroad;
  • a member of the Board of Directors of the Corporation, regardless of whether or not they hold that position full-time;
  • Sweat equity shares must be made available to a third party that will substantially develop the company. In the context of intellectual property rights, the term “value addition” refers to the actual or potential financial benefits that a company has obtained or will obtain from an expert or professional in exchange for their knowledge or the availability of rights in a specific area of intellectual property rights. Value addition can be real or prospective.

Issue Restrictions

  • The issue of sweat equity shares requires a particular resolution that was passed by the business.
  • The special resolution sanctioning the issuing of sweat equity shares will only have been in effect for one year.
  • Sweat Equity Shareholders are entitled to the same rights, restrictions, and limits as other Equity Shareholders. This is a requirement of Sweat Equity Shares.
  • Sweat equity shares must be evaluated at a price determined by a registered valuer as the fair value, together with an explanation of the valuation.
  • The valuation of intellectual property rights, knowledge, or value addition for which sweat equity shares are to be given must be carried out by a registered valuer. The Board of Directors is also required to obtain a comprehensive report from the valuer that provides an explanation of the reasoning behind the valuation.

Restriction Before and After the Issue

  • Sweat equity shares given to directors or employees are subject to restrictions and cannot be transferred for a period of three years from the distribution date. The lock-in period and its expiry date must be conspicuously shown on the share certificate or stamped in boldface.
  • Sweat equity shares cannot be issued by a company for more than Rs. 5 crores or for more than Rs. 2 crores, whichever is larger.
  • 25 percent of a company’s paid-up equity capital may be held in Sweat equity shares.
  • When sweat equity shares are issued, the company is required to maintain a registration of them at its registered office.

Conditions on Issue of Sweat Equity Shares

The sweat equity shares that will be issued must be valued at a reasonable price by a qualified valuer. The appraiser is also required to create a report that provides an explanation of the reasons behind the appraisal. During a period of 3 years from the date of distribution, sweat equity shares awarded to directors or employees are not transferrable.

According to Form No. 1, the company is required to maintain a record of the sweat equity shares. SH-3. Information on the issued sweat equity shares must be included in the register. The Board of Directors may choose a different location for the register’s storage, but it must be maintained at the company’s registered office at all times. The register entries must be certified by the company secretary or another official who has been approved by the Board of Directors under Sections 2 or 3.

The following information must be included in the Board Report for the year the sweat equity issue is brought up:

  • These shares were given to a group of directors or employees in the amount of 2 to 5 shares.
  • These shares are a kind of issued share.
  • These shares distributed to directors, senior management professionals, or other employees, detailing separately the amount of such shares granted to them, if any, for remuneration other than cash, as well as the precise names of allottees holding % or more of the issued share capital.
  • Justifications and explanations for the issue at hand
  • Limitations and restrictions, including the cost of the product or service
  • A total of 2,000,000 shares will be issued as a consequence of the offer.
  • Sweat equity shares account for % of the total post-issued and paid-up share capital.
  • Amount of money or any other benefit achieved by the company as a direct consequence of the relevant issue.
  • Sweat equity has diluted Earnings by 2 to 5 shares.

Conclusion

Sweat equity shares are given as payment to company directors and employees. Firms who want to issue these shares have a legal obligation to abide with section 54 of the Companies Act 2013 and the rules that follow. The listed companies must also adhere to the relevant SEBI (Securities and Exchange Board of India) Rules.

Also Read:
Issue Of Sweat Equity Shares

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