Defining Sweat Equity Shares as per Companies Act, 2013

As per Sub-section (88) of section 2: Sweat Equity Shares means equity shares issued by a company to its director or employee at discount or for consideration other than cash, for providing know-how or making available like intellectual property rights or value addition.

Eligibility for Sweat Equity Shares as per Companies Act, 2013

(a) A permanent employee of the company who has been working in India or outside India.

(b) A director of the company, whether a whole time director or not.

(c) An employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company.

Conditions to be fulfilled for the issue of Sweat Equity Shares

  • A special resolution shall be passed for authorizing the issue of sweat equity share.
  • Sweat equity shares can be issued by the company only after the expiry of one year from the date of commencement of business.
  • The sweat equity shares shall be issued with a lock-in period of three years.
  • Mention the fact that shares are locked-in along with the expiry of the lock-in period in the share certificate.
  • Shares issued at a fair price that is valued by a registered valuer. 

Quantum for Issue of Sweat Equity Shares

The company can issue sweat equity shares up to the higher of two:

  • 15% of existing paid-up share capital
  • INR 5 Crore.

Subject to 25% of the paid capital of the Company.

For the new start-up, the company issue cannot be more than 50% of its paid-up capital for 5 years from the date of incorporation.

Pricing of an Issue

The price of an issue shall be the value based on the price determined by a registered valuer as to the fair price. He shall justify reaching a certain value. The registered valuer shall carry the valuation of

  • Know-how
  • Intellectual property rights
  • Value addition for the sweat equity

Procedure for Sweat Equity Shares as per Companies Act, 2013

1. Call & Convene Board meeting with atleast 7 days notice for discussing following agendas:

  • Consideration of proposal of issue of sweat equity shares.
  • Appointment of Register valuer for the valuation report.
  • Fixing up the date, time, venue & agenda for calling EGM.

2. Issue notice for extra-ordinary general meeting at least 21 clear days before the date of the meeting.

3. Conduct Extra General meeting and pass the necessary resolution for the approval of the issue of sweat equity share.

4.  File MGT-14 with ROC within 30 days of passing resolution.

5. Conduct Board meeting for allotment of sweat equity shares and file PAS-3 with the Registrar.

Post Sweat Equity Shares Issue Compliance

The Board of Directors shall, inter alia, disclose in the Directors’ Report for the year in which such shares are issued, the following details of issue of sweat equity shares namely:-

(a) the class of director or employee to whom sweat equity shares were issued.

(b) the class of shares issued as Sweat Equity Shares.

(c) the number of sweat equity shares issued to the directors, key managerial personnel or other employees showing separately the number of such shares issued to them , if any, for consideration other than cash and the individual names of allottees holding one percent or more of the issued share capital.

(d) the reasons or justification for the issue.

(e) the principal terms and conditions for issue of sweat equity shares, including pricing formula.

(f) the total number of shares arising as a result of issue of sweat equity shares.

(g) the percentage of the sweat equity shares of the total post issued and paid up share capital.

(h) the consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares.

(i) the diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.

Forms and Register Include 

MGT-14, PAS-3 and SH-3

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January 2021