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Sweat Equity

Sweat equity is a way of incentivising employees who contribute know-how or technical expertise (in the nature of intellectual property). As per Section 79A of the Companies Act, sweat equity shares are issued by the company to employees or directors (including promoters, this is a key difference between sweat equity and ESOPs or ESPS), either at a discount, or for non-cash consideration, in return for i) providing know-how, or ii) making available rights in the nature of intellectual property rights or iii) some other kind of value addition. A value addition refers to anticipated economic benefits derived from an expert or professional for providing know-how or making some intellectual property rights available, for which he is not remunerated contractually (whether through an employment contract or a services or consultancy agreement).

Sweat equity shares may be issued to directors, employees or promoters after one year from the time when the company was legally entitled to commence business. The issue must comply with SEBI (Issue of Sweat Equity) Regulations, 2002 (for listed companies), or the  Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003 issued by the Central Government for private companies and unlisted public companies (referred to as the Sweat Equity Instruments). The legal provisions discussed below also apply to issue of sweat equity shares by foreign subsidiaries of Indian companies.


Note: Private companies are entitled to commence business from the date of receipt of certificate of incorporation. Public companies may commence business after receipt of certificate of commencement of business.

The following conditions must be satisfied for issue of sweat equity shares:

 a special resolution authorising the issue must be passed in a general meeting. The resolution must specify the number of shares, current market price, consideration (if any), and the class of directors or employees to whom the shares are to be issued.

2)  If 1% or more of the issued capital in any year is issued by way of sweat equity shares, a separate resolution of shareholders must be obtained, in addition to the special resolution.

Private and unlisted public companies cannot issue sweat equity shares for more than 15% of total paid up equity share capital in a year or shares of the value of Rs. 5 crores, whichever is higher, without prior approval of the Central Government.

If a listed company issues sweat equity shares to an employee/ director who is also a promoter, a separate approval from a simple majority of shareholders by postal ballot is required. Promoters to whom shares are proposed to be issued cannot participate in the voting process.

Pricing of shares issued

The price of shares (for a private company or an unlisted public company) must be at a fair valuation as determined by an independent valuer. For listed companies, minimum price should be the higher of average weekly high and low of the closing prices of the shares for a period of:

  • 2 weeks prior to the date of the shareholder's meeting for approval of the issue
  • 6 months prior to the date of the meeting

6)  Valuation of the intellectual property, know-how or value-addition

Valuation of intellectual property, know-how or any other value addition by the prospective shareholder must be conducted by an independent valuer. If the issue is by a listed company, the valuation must be conducted by a merchant banker registered with the SEBI. The merchant banker must also obtain a certificate from an Independent Chartered Accountant, stating that the valuation has been conducted in accordance with relevant accounting standards.

The valuer/ merchant banker may consult other experts during the process. For a private or unlisted company, a copy of the valuation report justifying the basis for valuation must be presented to the shareholders at the time of approving issue.  

Transferablity and lock-in requirements

Sweat equity shares are subject to a lock-in of 3 years after issue and cannot be transferred for such period.

Post-issue Compliance

  1.    Auditor's certificate: A certificate from the auditors that the issue of sweat equity shares has been in accordance with the Companies Act and applicable rules or regulations must be placed before the shareholders in the next AGM.
  2. Register of sweat equity shares - A register of sweat equity shares must be maintained by the company, containing the details prescribed in the relevant Sweat Equity Instrument.
  3. Disclosures in Director's Report: The Director's Report placed before the shareholders in the AGM after the sweat equity shares are allotted must details relating to the number of shares to be issued to the employees or the directors, conditions for issue of sweat equity shares, the pricing formula, the benefit to the company from the issue of sweat equity shares, and the diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.
  4. Information to stock exchange (for listed companies only) - A listed company is required to provide prescribed particulars relating to issue of shares to the stock exchanges on which its shares are listed.


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