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Sweat Equity Shares

Sweat Equity Shares

Section 54 of the Companies Act, 2013 deals with the Issue of Sweat Equity Shares. As per section 54, the employees may be compensated in the form of “Sweat Equity Shares”.

Sweat Equity Shares were not defined in the Companies Act, 1956 but the Companies Act, 2013 has defined the Sweat Equity under Section 2(88) as follows :

Sweat Equity Shares means 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 rights in the nature of intellectual property rights or value additions, by whatever name called.

Conditions for Issuing Sweat Equity Shares

  • Special Resolution should be passed by the company in general meeting to authorize the issue.
  • Not more than 12 months from the dating of passing the special resolution should have elapsed for issuing the sweat equity.
  • The resolution should specify the number of shares, the current market value, consideration if any, the class of directors to whom shares are issued, the class of employees to whom the shares are to be issued.
  • Sweat equity shares issued to employees or directors should have a lock in period of three years.
  • One year should have elapsed from the date of commencement of business to issue Sweat Equity shares.
  • SEBI Rules should be conformed with if it is listed.
  • The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued and the holders of such shares shall rank pari pasu with other equity shareholders.

Purpose for Issuing Sweat Equity Shares 

  • at a discount
  • for consideration other than cash
  • for providing technical knowhow
  • making available the rights to intellectual property rights
  • value additions by what ever name called

Limit on Issuance of Sweat Equity Shares

  • The company shall not issue sweat equity shares for more than 15% of the existing paid up equity share capital in a year or shares of the issue value of Rs. 5 crores, whichever is higher.
  • The issuance of sweat equity shares in the Company shall not exceed 25% of the paid up equity capital of the Company at any time.

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