Corporate Accounting

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.

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.

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