“SECTION 2(88) ‘Sweat equity shares’ means Equity shares issued by the company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value addition by whatever name called.”

Put simply; The term sweat equity is all about a person or company’s contribution toward a business venture or other project. Sweat equity is generally not monetary and, in most cases, comes in the form of physical labor, mental effort, and time. Sweat equity basically refers to the amplifying value of a project or venture by providing your physical labor, mental capacity, or time.

Why Sweat Equity Shares?

So the answer is, Sweat Equity allows a company to raise funds without increasing debt levels. Usually, this option is opted by start-ups that are at the seedling stage since they tend to face complications in raising capital and obtaining too much debt at an early stage which can cripple their business at the starting stage.

Therefore, here comes the role of sweat equity shares which provides companies with a platform to get “ easy money” or “free money” just by selling a part of a company’s stock to its internal investors.

Conditions for Issue of Sweat Equity Shares :

There are certain circumstances that should be satisfied by the organization before giving perspiration value shares.

A special resolution is passed for approving the issue of sweat value share.
The Listed organizations need to follow the arrangements of SEBI for the issue of Sweat value shares while the unlisted organization can issue according to Section 54 of the Companies Act, 2013.
These offers can be given by the organization after the expiry of one year from the date of the beginning of a business.

The organization can give sweat value shares up to:

Fifteen percent of the current settled capital.
Rs 5 Crore (Subject to 25 percent of the settled up capital of the organization).
The Sweat Equity shares should be given a lock-in time of three years.
The realities should be referenced; for example, the offers are secured alongside the expiry of the lock-in period in the offer declaration.
The offers should be given at a fair cost.
How much perspiration value ought to be treated as administrative compensation in the event that it satisfies the accompanying circumstances:
In the event that it is given to the Director or supervisor.
Assuming they are given non-cash thought.
The insights about the issue and apportioning of sweat value shares should be referenced in the Board report with the accompanying subtleties.
Class of Directors.
Class of Shares.
Number id gave shares.
The equation is utilized for valuation.
Sweat value portions of the complete post-issue settled-up capital.
The thought got or advantages to the organization.
Assuming that the offers are given for non-cash thought, it should be treated in the books of record of the organization:
Whenever it appears as a depreciable resource, it should be noted in the yet-to-be-determined sheet.
While in different cases, it is treated as a cost by the bookkeeping standard.

What are the Limits for the issue of Sweat Equity Shares?

There are sure cutoff points to the issue of Sweat Equity Shares. These are:

The issue ought not to surpass the higher of the accompanying:

Fifteen percent of existing paid-up capital.
Issue Value of INR. 5 Crore.
The issue can’t surpass 25% of the settled-up value capital.
For the new businesses, the organization can’t give in excess of 50% of its paid-up capital for a very long time from the date of organization fuses.

When will Sweat equity shares be issued?

Sweat equity shares as per Companies Act 2013 state that ‘At least one year must have elapsed between the commencement of the business by the company and the date of the issue.’

Compliance of Rules

The sweat equity shares are issued in accordance with the regulations made by SEBI in a listed company whose shares are listed on well-known Stock exchange.
In the case of an unlisted company, rules by the Central Government should have been applied.

Register of Sweat Equity Shares :

Maintain a Register in Form SH-3

(a) The company shall maintain a register of sweat equity shares in Form No. SH.3 and shall enter the details of sweat equity shares issued under section 54 therein.
(b) the register of sweat equity shares shall be maintained at the registered office of the company or at such other place as may be decided by the Board.
(c) the entries in the register shall be certified by the Company Secretary of the company or any other person authorized by the Board for the purpose.

Section 54 of Companies Act 2013

To Issue a Sweat Equity shares as per Companies Act, Section 54 must be followed. It is as follows:

*54. (1) Notwithstanding anything contained in section 53, a company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled, namely:—

(a) the issue is authorized by a special resolution passed by the company;

(b) the resolution specifies the number of shares, the current market price, consideration if any, and the class or classes of directors or employees to whom such equity shares are to be issued;

(c) Notwithstanding anything contained in section 53, a company may issue sweat equity shares of a class of shares already issued.

(d) where the company’s equity shares are listed on a recognized stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board on this behalf. If they are not listed, the sweat equity shares are issued following such rules as may be prescribed.

(2) The rights, limitations, restrictions, and provisions for the time applying to equity shares shall apply to the sweat equity shares issued under this section, and the holders of such shares shall rank pari passu with other equity shareholders.

Swagata Pramanik

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