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What is sweat equity?
Sweat equity refers to shares given to a company’s employees or directors on favourable terms in recognition of their work. These shares are issued to employees or directors at a discount or for a consideration other than cash for providing know-how, making available rights in the nature of intellectual property rights or value additions.
Why is sweat equity issued?
The idea behind issuing sweat equity is to retain your best employees. There is no limit to the discount on share price that can be offered. Sweat equity makes employees part owners of the company and gives them a share of profits earned.
Is there any limit to the amount of sweat equity?
The sweat equity issued during a year should not exceed 15% of the total paid-up capital of the company or a value of Rs 5 crore, whichever is higher. The company needs to get prior approval of the central government to go beyond this level. It is also restricted from issuing sweat equity before completing one year of incorporation.
Who determines the value of sweat equity?
The price of sweat equity shall be determined by an independent valuer. If shares are issued for a consideration other than cash, the valuation of intellectual property or know-how shall be carried out by a valuer. Such valuer shall consult experts considering the nature of the industry and the value addition.
What steps do a company need to take?
The issue of sweat equity shares should be approved by shareholders by means of a special resolution at a general meeting or an extra-ordinary general meeting of a company. The explanatory statement accompanying the notice of the general meeting should include reasons and justifications for such the sweat equity issue, value of such shares, the valuation report and other details.
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