All About Sweat Equity Shares

Sweat Equity shares are the shares issued by a company in the form of reward to its directors or employees. Shares are issued at discount or Consideration other than cash for providing knowhow or making any value additions which generates synergy to the company. Sweat Equity shares is the reward given to the directors or employees for their hardwork and dedication towards the Company.

The Term Employee means:

  • A permanent employee of the company who has been working in India or outside India, for at least the last one year or
  • A director of the company, whether a whole time director or not or
  • An employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company.

A Company is eligible to issue sweat equity shares only when one year has been elapsed from the date of incorporation.

Procedure To Issue Sweat Shares

  1. Board meeting to be held to consider issue of sweat equity shares and issue notice for general meeting
  2. General meeting to be held to pass the special resolution which shall specify the number of shares, current market price if the shares are listed, Consideration of issue if any and the class or classes of directors or employees to whom such shares are to be issued
  3. An explanatory statement must be attached along with the notice of General Meeting and shall include the following:
    • The date of the Board meeting at which the proposal for issue of sweat equity shares was approved
    • To specify the reasons or justification for the issue
    • The class of shares under which sweat equity shares are intended to be issued
    • The total number of sweat equity shares to be issued
    • The class or classes of directors or employees to whom such equity shares are to be issued
    • The terms and conditions on which sweat equity shares are to be issued, including basis of valuation
    • The time period of association of such person with the company
    • The names of the directors or employees to whom the sweat equity shares will be issued and their relationship with the promoter or/and Key Managerial Personnel; i. t j. t; k. t l. a m. d n. a
    • The price at which the sweat equity shares are proposed to be issued
    • The consideration including consideration other than cash, if any to be received for the sweat equity
    • The ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity and how it is proposed to be dealt with
    • A statement to the effect that the company shall conform to the applicable accounting standards
    • Diluted Earning Per Share pursuant to the issue of sweat equity shares , calculated in accordance with the applicable accounting standards
    • And a copy of the gist along with the critical elements of valuation report obtained with from the registered valuer towards the valuation of the shares for determining the price of shares at which sweat equity shall be issued and the valuation report for issuing the sweat equity against the intellectual property rights or know how or value additions shall be sent with the notice of the general meeting
  4. File the special resolution in Form MGT-14
  5. Hold Board meeting to issue Sweat Equity shares and then file form PAS-3 with ROC


  1. The issue of sweat equity shares shall not be more than 15 percent of the existing paid-up equity share capital in a year or shares of the issue value of Rupees Five Crores, whichever is higher. However the issuance of sweat equity shares in the Company shall any time not exceed 25% of the paid-up capital of the company.
  2. Lock in period of atleast 3 years from the date of allotment.
  3. The special resolution authorising the issue of sweat equity shares is required.
  4. Shares to be valued at a price determined by a registered valuer as fair price giving justification.
  5. Also the valuation of IPR or of Know how or value additions for which shares are to be issued shall be carried out by a registered valuer giving justification to the board of directors.

Disclosure In Directors Report

All the details of Issuing the Sweat Equity shares shall be disclosed in the Boards Report.

Register Of Sweat Equity Shares

After allotting the Sweat Equity Shares the entry for the same is to be done in the Register.