Whenever investor puts their hard-earned money in the financial market[1], they are generally rewarded by the company’s securities in exchange for their money. Investors could subscribe to the firm’s equity shares, debentures, or preferential shares. Equity is somewhat identical to owning a company’s asset. The term sweat equity refers to a person or company’s contribution towards the company venture or a project in terms of hardship and labour. It has nothing to do with monetary support. The write-up will let you understand the notion behind the Sweat equity shares and its legal implications.
What Do You Mean By Sweat Equity?
Sweat Equity refers to a contribution of an individual or a company toward the business or project in the form of hardship and effort. The sweat equity’s valuation is identical to that of the cash equity. To some extent, sweat equity also helps organizations with employee retention issues.
By rewarding employees with sweat equity, companies can expect better commitment and performance from them. Sweat equity shares are also given to the KMPs and directors, at a discount or for a consideration that doesn’t involve cash. In return, the rewarded officials provide the expertise that adds value to the firm. Sweat equity shares are only accessible to
- Permanent employees working for at least the preceding one year;
- Director of the company.
- Employee or Director of the company’s subsidiary, irrespective of its company’s location.
- Employee or Director of the holding company.
The issuance of sweat Equity Shares sets the stage for value addition from the rewarded employees. The term value addition here refers to expected economic benefits from these officials through their experience and expertise.
Note: The remuneration under sweat equity does not fall under the normal remuneration payable under the employment contract or fiscal consideration payable under any other agreement.
Procedure Regarding the Issuance of Sweat Equity Shares
Sweat equity shares falls under the class of shares already dispensed by the company. Therefore, the rights, obligations, and norms applicable to equity shares are applied to sweat equity shares and other equity shareholders. The issue of sweat equity shares cannot come into effect unless approved via a special resolution.
The resolution must signify the shares’ number, prevailing market price, consideration, and a class of directors and employees possessing such equity shares.
The following notification shall serve as an annexure to the notice of meeting for passing special resolution:
- Date of a Board meeting that approved the proposal for issuance of sweat equity.
- The reasons supporting the issuance of the sweat equity
- The class of shares encompassing the sweat equity shares
- Number of proposed sweat equity shares
- The class of Directors or employees who will be getting equity shares
- Principal terms and norms concerning the issuance of sweat equity and the basis of valuation
- Duration of association of such an individual with the organization
- The name and details concerning the Directors or employees and their interplay with the KMPs and promoters
- The proposed price of the sweat equity shares
- Consideration that does not involve cash, if any to be received for the sweat received
- Particulars regarding ceiling on managerial remuneration, if it exist, be contravened by the issue of such equity and what are the measures to handle that.
- Statement highlighting that the company will abide by the prevailing accounting standards to maintain transparency
- Diluted earnings per share in accordance with the issuance of sweat equity securities are computed as per the prevailing accounting norms.
Conclusion
Sweat Equity Shares are awarded to employees who have made a valuable contribution towards the company’s growth with their hardship in the form of know-how, IPR, and domain expertise. The issuance of such shares in a legal context is known as Sweaty Equity.
Sweat Equity is valuable for companies as it ensures taxation benefits, cost-effectiveness, employee retention, and fewer compliances. The notion of sweat equity has a widespread presence as it is used globally by almost all employees-favouring companies.
Read Our Article: Types of Shares / Securities for Private Limited Companies
