Sweat Equity Shares are equity shares issued by a company to its directors or employees at a discount or for consideration other than cash, in recognition of their work, value additions, or intellectual property.

These are typically issued to reward key contributors who help in building the company through their knowledge, effort, or technical expertise rather than financial investment.

Section 54 of the Companies Act, 2013 governs the issuance of sweat equity shares. It allows companies to issue sweat equity shares, provided certain conditions and procedures are met.

It applies to:

• All companies (public or private), except where specifically exempted.
• Employees or directors who provide technical know-how, intellectual property rights, or other value additions.

Eligibility to Issue Sweat Equity Shares

A company can issue sweat equity shares only if:

1. It has been in existence for at least one year.
2. The issue is authorized by a special resolution in a general meeting.
3. The shares are issued to employees or directors.
4. The issue is in accordance with SEBI regulations, if applicable (for listed companies), or as per Companies (Share Capital and Debentures) Rules, 2014 (for unlisted companies).

Step-by-Step Process for Issuing Sweat Equity Shares

Step 1: Check Articles of Association (AoA)

• Confirm that the Articles of Association (AoA) permit the issue of sweat equity shares.
• If not, pass a special resolution to alter the AoA.

Step 2: Hold Board Meeting

• Convene a Board Meeting to:
  • Approve the proposal to issue sweat equity shares.
  • Fix the date, time, and venue of the General Meeting.
  • Approve the draft notice and explanatory statement for shareholders’ meeting.

Step 3: Send Notice for General Meeting

• Send a notice of the Extraordinary General Meeting (EGM) or Annual General Meeting (AGM) to all shareholders.
• Include an explanatory statement with the following disclosures:
  • Date of board meeting.
  • Reasons and justification for the issue.
  • Class of shares and price.
  • Number and percentage of shares to be issued.
  • Identity of recipients.
  • Valuation report.

Step 4: Hold General Meeting – Pass Special Resolution

• Pass a special resolution (requires 75% majority) authorizing the issue.
• Valid for 12 months from the date of passing.

Step 5: Valuation Report by Registered Valuer

• Obtain a valuation report from a registered valuer:
  • To determine the fair value of shares.
  • To evaluate the value of intellectual property or technical know-how contributed by the employee/director.

Step 6: File MGT-14 with ROC

• File the resolution with the Registrar of Companies (ROC) in Form MGT-14 within 30 days of passing the special resolution.

Step 7: Allotment of Shares

• Conduct a Board Meeting to allot the sweat equity shares to eligible employees or directors.

📌 Maintain Register of Sweat Equity Shares in Form SH-3.

Step 8: File Return of Allotment (PAS-3)

• File Form PAS-3 with ROC within 15 days of allotment.
• Include:
  • Details of the allottees.
  • Board resolution.
  • Valuation report.
  • Copy of special resolution.

Step 9: Issue Share Certificates

• Prepare and issue share certificates to allottees within 2 months of allotment.

📌 Ensure proper stamping and entry in register of members.

Step 10: Disclosures in Board Report

• In the Board’s Report, disclose:
  • Number and class of sweat equity shares issued.
  • The value of consideration.
  • Details of recipients.
  • Impact on the company’s profit and loss.
  • Dilution of EPS (Earnings per Share), if any.

Key Conditions to Remember

Forms to be Filed with ROC