Sweat Equity
- According to the Companies Act, sweat equity are equity shares that a company issues to an individual in consideration of his/her services, knowhow or any other value addition that the company has benefited from. The Company can choose to pay its employees in terms of sweat equity rather than in cash.
- All the limitations, restrictions and provisions relating to equity shares are applicable to such sweat equity shares. These equity shares can be issued free of monetary consideration or at such concessions and discounts as the management may decide.
- A company has to comply with following conditions before issue of sweat equity shares
- the issue of sweat equity shares is authorized by a special resolution passed by the company.
- the resolution specifies the number of shares, current market price, monetary consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued.
- not less than one year has, at the date of the issue, elapsed since the date on which the company was entitled to commence business
- the sweat equity shares of a company whose equity shares are listed on a recognized stock exchange are issued in accordance with the regulations made by the Securities and Exchange Board of India (SEBI) in this behalf.
- Sweat equity is similar to stock options to the extent that both are means of providing non-cash incentive or compensation to individuals. However, sweat equity, as widely understood, are real shares allotted to individuals upfront. Whereas, Stock option is merely a right given to an individual to acquire shares of the company at a future date at a pre-agreed price. SEBI has issued separate guidelines for sweat equity and stock options.
- The Companies Act allows an unlisted company to issue up to 15 per cent of the existing equity share capital in a year, shares of the issue value of Rs. 5 crores, whichever is higher.
- In India, sweat equity shares can be issued only to permanent employees or directors.
