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SWEAT EQUITY SHARES – are Equity Shares issued by a company to its Permanent Employees and Directors, and Employees and Directors of Holding and Subsidiary Companies against valuable services rendered by them to the Company.
- INTENT : Generally Sweat Equity Shares are issued by a company to its employees or directors if they create or develop Intellectual Properties for the company or add some exceptional value to the company.
- COST : Company may issue such shares for free of cost or concessional amount or for consideration other than cash.
- VALUATION : A Valuation Report is required to assess the exercise price of the share and cost of properties or right added by the employees or directors.
- ISSUE SIZE : A company can issue total 15% of the Paid Up capital or Rs. 5 Cr., whichever is higher in a Financial Year subject to ceiling of 25% of the Paid Up Capital of the Company.
- TRANSFERABILITY : Transfer of such shares are not allowed for three years.
- TAX : Benefits of the Sweat Equity shall be added to remuneration of the employee and directors for Income Tax purpose.
- ACCOUNTING : The benefits provided to the employees and directors shall be accounted as expense during the year
- LEGAL : Issue of Sweat Equity is governed by Section 54 of Companies Act, 2013, read with Rule 8 of Companies (Share Capital and Debenture) Rules, 2014.
- HOW IS IT DIFFERENT FROM ESOP ?
Under ESOPs, a company gives an option to its employees to subscribe the shares at a future date which last generally three to five years but in SWEAT EQUITY, a company issues shares to employees for subscription at current date. Moreover, company can not grant ESOPs to Promoters of the company but Promoters are eligible for the SWEAT EQUITY.
Nutshell
Sweat Equity is a win-win situation for startups and growing companies since, in initial stage, they do not have sufficient funds to pay fee/consideration to professionals. Thus, they can issue Sweat Equity for paying for the services. Also, sharing ownership with such professionals improves the quality of their services to the Company.
