Issue of Sweat Equity Shares
According to 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.

According to Explanation to Rule 8(1) of Companies (Share Capital and Debentures) Rules, 2014:
(ii) the expression ‘‘Employee’’ means –
(a) a permanent employee of the company who has been working in India or outside India, for at least last one year; or
(b) a director of the company, whether a whole time director or not; or
(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;
(iii) the expression ‘Value additions’ means actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights, by such person to whom sweat equity is being issued for which the consideration is not paid or included in the normal remuneration payable under the contract of employment, in the case of an employee.

Section 54 permits issue of such equity shares to employees or directors in recognition of their contribution for providing know-how etc. as aforesaid. As the contribution made by employees/directors results in increased profits to the company for a number of years, sweat equity provide a new form of adequate return.

Conditions for Issue of Sweat Equity Shares

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

(i) the issue has been authorized by a special resolution passed by the company in the general meeting.

(ii) the following are clearly specified in the resolution:

(a) number of shares;

(b) current market price;

(c) consideration, if any; and

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

(iii) Where shares are listed on a recognized stock exchange, the company issuing sweat equity shares should comply with the regulations made in this behalf by SEBI

(iv) a company whose shares are not so listed should issue sweat equity shares in compliance with the rules made in this behalf by the Central Government i.e., Companies (Share Capital and Debentures) Rules, 2014.

Limits on issue of sweat equity shares
Rule 8(4) states that the company shall not issue sweat equity shares for more than fifteen percent of the existing paid up equity share capital in a year or shares of the issue value of rupees five crores, whichever is higher. The issuance of sweat equity shares in the company shall not exceed twenty five percent, of the paid up equity capital of the company at any time.

Sweat Equity Shares to be locked for three years
The sweat equity issued to directors or employees shall be locked for a period of three years from the date of allotment and the fact that the share certificates are under lock-in and the period of expiry of lock in shall be stamped in bold or mentioned in any other prominent manner on the share certificate. [Rule 8(5)]

Sweat equity shares for non-cash consideration
Rule 9 states that when sweat equity 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 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, namely –
(a) the sweat equity 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.
Sweat equity shares and compensation aspects
• If the sweat equity are not issued pursuant to acquisition of an asset Rule 8(11) states that in respect of sweat equity shares issued during an accounting period, the accounting value of sweat equity shares(i.e., fair value by Registered valuer shall be treated as a form of compensation to the employee or the director in the financial statements of the company.
• If the shares are issued pursuant to acquisition of an asset Rule 8(12) states that if the shares are issued pursuant to acquisition of an asset, the value of the asset, as determined by the valuation report, shall be carried in the balance sheet as per the

Accounting Standards and such amount of the accounting value of the sweat equity that is in excess of the value of the asset acquired, as per the valuation report, shall be treated as a form of compensation to the employee or the director in the financial statements of the company.

For Consultancy Regarding issue, or allotment of Sweat Equity Shares, talk to our advisor or raise a query at Filings