All About Sweat Equity Shares

An employee's hard work can be recognised and rewarded through sweat equity shares. It also encourages employees to stay with their employer for a longer period of time. Look over the essential facts regarding these shares immediately.

There are a variety of methods in which a firm may show its employees how much they are appreciated and thank them. Incentives like this encourage employees to stay with the company for a lengthy period of time. Shares might be issued as a form of compensation in this regard. Employees Stock Option Scheme (ESOP) and Sweat Equity Shares are two methods through which companies offer stock options to their workers.

Sweat Equity Shares :

These shares are typically given as a token of appreciation for employees' efforts. These are the shares that employees receive that represent a portion of the company's profit. They utilise it to recruit talent, retain employees, and recognise them for their exceptional performance.

According to Section 2 of the Companies Act, 2013, sweat equity shares are defined as equity shares issued by a company to its directors or employees at a discount or for consideration other than cash in exchange for providing their know-how or making available intellectual property rights or value additions.

It may be given by a business for a variety of reasons:

An employee's or a director's extraordinary participation and efforts toward the completion of a project

• Expertise in the field

• Enhancement of the company's value through exceptional contributions and acquisition of intellectual property rights.

• The Companies Act, 1956, as well as the Companies Act, 2013, govern the issuance of sweat equity shares. If an unlisted firm issues sweat shares, it must adhere to Section 54, whereas a public company must adhere to the market regulator Sebi's rules as well as the Companies Act, 2013.

• Sweat shares are available to anyone who is a permanent employee of a business, whether in India or overseas. The Company's Act defines an employee as:

1. A person who has been employed in a permanent capacity by a firm in or from outside India for at least one year, OR

2. A director of the corporation, regardless of whether he or she is a full-time director, OR

3. An employee or director of the entity's holding or subsidiary firm in or outside India, as specified above.

Quantity of Sweat Equity Shares issued:

The Company must not issue Sweat Equity Shares in excess of 15% of its current paid-up share capital or for more than Rs. 5 crore in issue value, whichever is greater.

For the remainder of the Company's existence, the Company shall not issue Sweat Equity shares representing more than 25% of the paid-up Equity Capital at any time. Sweat Equity Shares may be issued by start-ups up to 50% of their paid-up capital within five years of their incorporation or registration.

A share certificate must be provided within two months of the employees receiving their shares. The shares must be allotted within 12 months of the resolution authorising the issue being passed.

A valuer is appointed to determine the sweat equity shares' fair market value.

Lock in period:

Sweat equity shares are non-transferable and are subject to a three-year lock-in term beginning on the date of issuance. Employees must also obtain a share certificate specifying the same. After the lock-in period expires, the share certificate must state that it has expired.

Declarations:

After allocating sweat shares, the business is required to declare who received them and the rationale for allocation. Additionally, the amount of shares granted and the terms and conditions governing the sweat equity. Additionally, the percentage of sweat equity shares in relation to total equity post-issuance and paid-up share capital must be declared. Finally, the corporation must distribute diluted earnings per share in connection with the issuance of sweat equity shares.

Sweat equity shares are a mechanism for a business to recognise and reward an employee's efforts. Additionally, it enables employees to remain with their organisation for a longer period of time. Additionally, it eliminated the need to compensate staff in the event of a cash flow crisis. It benefits not just employees, but also employers.