Restrictions on Sweat Equity Shares

Sweat equity shares are equity shares issued by a company to its directors or employees at a discount for consideration, other than cash, for providing know-how or making available intellectual property rights like copyright, patent or trademark or other value additions. Sweat equity shares of a company can be issued by passing a special resolution with a detailed explanatory statement. However, all issue of sweat equity shares by a company are subject to the following restrictions:

Restrictions on Recipient

Sweat equity shares can be issued only to a permanent employee of the company who has been working in India or outside India, for atleast the last one year with the company;
A director of the company, whether whole-time director or not;
The person to whom sweat equity shares are being issued must provide significant value addition to the company. Value addition means actual or anticipated economic benefits derived or to be derived by the company from an expert or professional for providing know-how or making available rights in the nature of intellectual property rights.

Restrictions on Issue

The issue of sweat equity shares must be authorised by a special resolution passed by the company;
The special resolution authorising issue of sweat equity shares should only be valid for one year from the date of passing of the resolution;
The rights, limitations, restrictions and provisions applicable to the sweat equity shares holders must also rank pari passu with other equity shareholders.
Sweat equity shares to be issued must be valued at a price determined by a registered valuer as the fair value giving justification for such valuation.
The valuation of intellectual property rights or of know-how or value addition for which sweat equity shares are to be issued, must be carried out by a registered valuer, who will also provide a proper report addressed to the Board of Directors with justification for such valuation.

Restrictions Pre & Post Issue

Sweat equity shares issued to directors or employees should be locked-in and non-transferable for a period of three years from the date of allotment. The lock-in period and expiry of lock-in period must be stamped in bold or mentioned in any other prominent manner on the share certificate.
A company cannot issue sweat equity shares for more than 15% of the existing paid-up equity share capital in a year or shares of the issue value of Rs.5 crores, whichever is higher.
The issuance of sweat equity shares in a company can also not exceed 25% of the paid-up equity capital of the company at anytime.
On issuing sweat equity shares, a register of sweat equity shares must be maintained by the company at its registered office.

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Frequently Asked Questions

Common questions about Sweat Equity Shares: Issuance Restrictions & Compliance.

Sweat equity shares are equity shares issued by a company to its directors or employees at a discount in exchange for their expertise, intellectual property rights, or other value additions, rather than cash.

Sweat equity shares can be issued to permanent employees who have been working in India or outside India for at least the last one year, as well as directors of the company, whether whole-time or not. The recipient must provide significant value addition to the company.

Significant value addition means actual or anticipated economic benefits derived or to be derived by the company from an expert or professional's know-how or intellectual property rights, such as copyrights, patents, or trademarks.

The issue of sweat equity shares must be authorized by a special resolution passed by the company, which is valid for one year from the date of passing the resolution.

Sweat equity shares must be valued at a fair price determined by a registered valuer, who will also provide a report addressed to the Board of Directors with justification for the valuation.

Sweat equity shares issued to directors or employees are locked-in and non-transferable for three years from the date of allotment. The share certificates must prominently display the lock-in period and its expiry.

A company cannot issue sweat equity shares for more than 15% of its existing paid-up equity share capital in a year or shares of the issue value of Rs.5 crores, whichever is higher. The total sweat equity shares cannot exceed 25% of the paid-up equity capital at any time.

After issuing sweat equity shares, a company must maintain a register of sweat equity shares at its registered office.

No, the article specifies that sweat equity shares can only be issued to permanent employees and directors of the company, not external consultants or advisors.

Yes, the rights, limitations, restrictions, and provisions applicable to sweat equity shareholders must rank pari passu (equal) with other equity shareholders, according to the article.