What Are Sweat Equity Shares and Why Are They Issued?

Sweat equity shares are equity shares granted to employees of a company on favourable terms in recognition of their work.

Sweat equity shares are one form of share-based compensation for employees. The beneficiaries of sweat equity shares receive incentives in exchange for their contributions to the company’s growth.

Moreover, sweat equity shares encourage employees to contribute more value to the company by increasing their stakes and interest in its growth.

Why Sweat Equity Shares Are Issued?

Sometimes compensation and other benefits do not motivate directors and employees to perform better work for the organization. In addition to their salary and other incentives, directors and employees receive “Sweat Equity Shares.” These are typically provided to directors and employees at a discount or in exchange for something other than cash. All of these fundamentally contribute to the growth of the company. This does not lead to the company’s demise, but rather to the creation of valuable assets, such as intellectual property rights such as trademarks, copyright, and patents.

The company does not waste its valuable shares by issuing them to the general public; rather, it issues them to its directors and employees, which directly benefits the company. As global competition increases, there is a need to adhere to the company’s expansion to a very great extent. In order to encourage them, businesses issue sweat equity shares.

Conditions to be Fulfilled to Issue Sweat Equity Shares

(1) The issue is authorised by a special resolution that was passed by the company;

(2) The resolution specifies the number of shares, the current market price, consideration if any, and the class or classes of directors or employees to whom such equity shares are to be issued;

(3) The special resolution authorising the issue of sweat equity shares shall be valid for making the allotment within a period of not more than twelve months from the date of passing of the special resolution; and

(4) The special resolution authorising the issue of sweat equity shares. The sweat equity shares that are allotted to directors or employees must be locked in and non-transferable for a period of three years beginning on the date of allotment. Additionally, the fact that the share certificates are subject to lock-in and the period of time remaining on the lock-in must be stamped in bold or mentioned in any other prominent manner on the share certificate.

Disclosure in the Directors’ Report in Respect of Sweat Equity Shares

The Board of Directors must disclose, among other things, in the Directors’ Report for the year in which the shares were issued. The following are the specifics regarding the issuance of sweat equity shares:

(1) the category of director or employee-issued sweat equity shares;

(2) the class of shares issued as Sweat Equity Shares

(3) the number of sweat equity shares issued to directors, key managerial personnel, and other employees, including the number of such shares issued to them, if any, for consideration other than cash, as well as the names of allottees holding one per cent or more of the issued share capital.

(4) the justifications or reasons for the issue;

(5) the primary terms and conditions for the issuance of sweat equity shares, such as the pricing formula;

(6) the total number of shares resulting from the issuance of sweat equity shares; the proportion of sweat equity shares to the total issued and paid-up capital.

(8) the consideration (including non-cash consideration) or benefit accrued to the company as a result of the issuance of sweat equity shares.

(9) the diluted Earnings Per Share (EPS) as a result of sweat equity shares being issued.

Conclusion

Employees who are given sweet equity become partial owners of the company and receive a portion of the company’s profits. Employees who have a stake in the business are more likely to take initiative and act as if they are true business owners, which can boost both their careers and their financial well-being. Employers can show their appreciation for their employee’s contributions to the company’s success by presenting them with a gift of equity shares. Because of the availability of free shares through sweat equity, this is the case. The employee will not have to pay any money out of pocket to acquire the ownership stake in the business. This provides him with an incentive for his efforts without any additional financial outlay on his part.