What are Sweat Equity Shares


What are Sweat Equity Shares

Sweat equity shares are the non-monetary (benefits) shares issued by a company to its employees or Directors, either at a discount or for a consideration other than cash. Sweat equity shares is like a reward that companies offer to their employees.

Section 2(88) of the companies Act, 2013 describes the sweat equity shares. Here we have mentioned some important point related to sweat equity shares.

1. Remarkable contribution and efforts of an employee or a director in completion of company’s project.
2. Technical expertise.
3. Value edition to the company through extraordinary contribution.
4. Gaining intellectual property rights.

The companies usually offer sweat equity shares to their employees to attract and retain the talent which helps in company growth. If an employee has sweat equity shares, he or she can receive a part of the company’s profit as a return on their investment.

Law describes the sweat equity shares

The Sweat equity shares is regulated by the companies Act, 1956 and the companies act ,2013. If the company is unlisted then the entity has to follow Section 54 rules 2014.

Sweat Equity shares can be issued to:
• Permanent employee of the company
• Employee permanently working in India or outside of India, for at least last one year.
• Director of the company
• Director or employee above of a subsidiary

Reasons for issuing the Sweat Equity Shares

Sweat Equity shares are issued by the company Act, 1956, as well as the Companies Act of 2013. Here we have mentioned some of the reasons behind issuing Sweat Equity Shares.

1. If you are being offered sweat equity shares as an employee, you don’t have to indulge in stock market. Sweat equity shares is like a reward, but it has a mandatory lock-in time frame of three years with non-transferrable shares.

2. Companies offer sweat equity shares to the employees at the beginning stage of the company. This will help to ensure the employee growth along with the company’s growth.

3. Companies offer sweat equity shares at a discounted rate to its employees. Sweat equity shares offer the right of being bought and there’s no obligation to purchase them at particular price.

Benefits of Sweat Equity Shares

The key benefits of sweat equity shares for a company are given below-
1. Save Cash- Sweat equity shares are beneficial for cash-strapped businesses; offering equity as compensation reduces the cash expenses.

2. Retain Employees and Provide upside- Sweat equity is a generous reward for the employees and makes them feel valued. It gives a sense of ownership and responsibility in employees, helping them to retain talent for the company.

Important points for founders and employees with Sweat Equity shares
• Lock-in period - A lock-in period of three years may not be agreeable to the sweat equity holders.
• No vesting period - Founders may prefer to have a vesting period, while providing upside else there is a risk of employees for leaving the company with shares in hand.
• Upfront tax implications in the hands of an employe - There is no need to pay tax upon receiving the sweat equity shares.

To get more details about sweat equity shares, click here.

Also Read: How to buy Unlisted Stocks

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