Here's all you need to know about sweat equity!

What is sweat equity? 

In the corporate world, sweat equity refers to the provision of equity shares at discount or consideration (other than cash) to employees or directors of a company in compensation of their contribution or significant value addition to the company or a project. 

Sweat equity can be used in startups as compensation for paying lower salaries to the employees. This can be a motivating factor for employees to work towards achieving the company’s goals & objectives. It is also used by startup founders for claiming ownership of shares. 

As per the Companies (Share Capital & Debentures) Rules, sweat equity shares have a lock-in period of three years. They can be issued only after one year from the date of commencing business. In addition to this, only permanent employee of the company who has been working in India or abroad for at least one year is eligible to receive sweat equity. 

Sweat equity shares cannot be issued beyond 15 per cent of the existing paid-up equity share capital in a particular year or shares of the issue value of Rs 5 crore, whichever is higher. Moreover, a company’s sweat equity shares should not be issued beyond 25 per cent of its paid-up equity capital at any time. 

Process 

For issuing sweat equity shares, board meetings as well as general meetings have to be called and held. In these meetings, the issue proposal, date, time, quantity of shares, terms & conditions, etc. are discussed and a special resolution is passed. This resolution is filed with the Ministry of Corporate Affairs (MCA) by filling MGT-14 form within 30 days after the resolution is passed. Post this, another board meeting is held within which, the shares are allotted. The details of the issue are maintained in the register of sweat equity shares in form no. SH-3 and is then authenticated by the CS of the company.