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Share and Share Capital

Issue of sweat equity shares

sweat equity shares section 54 of companies Act, 2013

Defination of sweat equity share -

As per section 2(88), sweat equity shares mean such 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. 

Meaning of Employee for the purpose of issue of sweat equity share -

‘‘Employee’’ means-

(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; or

(c) an employee or a director of a subsidiary, in India or outside India, or of a holding company of the company.

Conditions for Issue of Sweat Equity Shares -

Section 54(1) provides that notwithstanding anything contained in Section 53, a company can issue sweat equity shares, of a class of shares already issued, if the following conditions are satisfied -

(i) Pass special resolution in general meeting but such resolution is valid for not more than 12 months from the date of passing of the special resolution.  

(ii) Following are clearly specified in the resolution - 

(a) number of shares.

(b) current market price. 

(c) consideration, if any and

(d) list of class or classes of directors or employees to whom such equity shares are to be issued.

(iii) The sweat equity shares issued to directors or employees shall be locked for a period of 3 years from the date of allotment 

(iv) As per section 54(2) rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be also applicable to the sweat equity shares.

(v) The details of issue of sweat equity share during the year in which such shares are issued are to be disclosed in the Board’s report of the company. 

(vi) Where shares are listed on a recognized stock exchange, the company should also comply with the regulations made in this behalf by SEBI.

Limits on issue of sweat equity shares -

Limits on issue of sweat equity shares

Sweat equity shares for non-cash consideration -

Rule 9 states that when sweat equity shares are issued for a non-cash consideration on the basis of a valuation report in respect thereof obtained from the registered valuer, such non-cash consideration shall be treated in the following manner in the books of account of the company –

(a) where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the accounting standards, or

(b) where clause (a) is not applicable, it shall be expensed as provided in the accounting standards.

Sweat equity shares forming part of managerial remuneration -

Rule 8(10) states that the amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purposes of sections 197 and 198 of the Act,

if the following conditions are fulfilled –

(a) the sweat equity shares are issued to any director or manager, and

(b) they are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards.

Maintenance of Register of Sweat Equity Shares -

  • Maintain a Register of Sweat Equity Shares in Form No. SH.3. 
  • The Register of Sweat Equity Shares shall be maintained at the registered office of the company. 
  • The entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.
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Company Law

Chapter's Name:

1. Introduction to Company Law
2. Incorporation of Companies
3. MOA and AOA of Company and Its Alteration
4. Prospectus And Allotment of Securities
5. Share and Share Capital

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