According to Section 53 of the Companies Act, 2013 a Company cannot issue shares on discount. Any shares issued by the Company at a discount shall be void. However, there are certain circumstances where Company can issue shares at a discount. One such type is Sweat Equity Shares.
Sweat equity shares are those shares which are issued by a company to its directors or Employees at a discount or for a consideration, other than cash for providing Know-how or to make available the rights like the intellectual property rights, by whatever name called.
These shares can be issued to the following category of employees –
- Permanent employee of the Company whether working in India or outside India;
- Director of the Company, whether a whole-time Director or not;
- Employee or Director as mentioned above of a Subsidiary in India or outside India, or of a Holding Company of the Company.
In general, these types of shares are rewarded to the employees and directors of the company who bring in their expertise and knowledge including technical expertise by distributing stock or other types of equity in a business in order to attract and motivate the employees .
CONDITIONS FOR ISSUE OF SWEAT EQUITY SHARES
- The sweat equity shares shouldn’t go beyond 25% of the paid-up equity capital of the issuing company at any point in time.
- Issue of sweat equity shares must be authorised by a special resolution passed by the company.
- Sweat equity shares have to be allotted within the 12 months from the date when the special resolution was passed
- The company has to furnish proper justification for the value of sweat equity shares
- The company shall issue such shares for-
- Not more than 15 percent of the existing paid-up equity share capital in a year or,
- The issue of the share value of rupees 5 crores whichever is higher.
- In case of Start-up Company the sweat equity share should not increase more than 50% of its paid-up capital up to the period of 5 years from the date of its incorporation.
WHY ARE SWEAT EQUITY SHARES ISSUED BY A COMPANY ?
A company may issue sweat equity shares due to the following reasons :-
- Sweat equity is direct allotment of shares at discount.
- Sweat equity negates the need to raise funds by taking on debt
- If an employee who has taken a pay cut in the initial days of the business, sweat equity shares make up for the loss they had faced earlier
- It provides an opportunity for the company to attract and also retain employees by rewarding their contribution.
Thus, in a nutshell, Sweat equity shares are beneficial to both the issuing company and the employee or directors who receive them. It helps the business retain its talented human resources and also raise funds in its initial stages without the need of availing debt and it rewards the beneficiaries by giving them incentives in lieu of their contribution towards the development of the company.