Sweat equity shares are equity shares issued to the directors or employees at a discount or for consideration other than cash, for providing know-how, intellectual property, or value additions. Section 54 of the Companies Act, 2013 and Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014 govern the issue, and the valuation must be conducted by a registered valuer.
The Valuation Requirement
Rule 8(6) requires the price of the sweat equity shares to be determined by a registered valuer as the fair price, giving justification for the valuation. The valuation must consider the value of the intellectual property, the know-how, or the value addition, and it must be supported by the valuer’s report. The valuation of the intellectual property or the know-how must also be conducted by a registered valuer.
The Limits
The issue of sweat equity shares must be authorised by a special resolution, and the resolution must specify the number of shares, the current market price, the consideration, and the class of directors or employees to whom the shares are issued. The sweat equity shares are subject to a lock-in of three years from the date of the allotment.
The company cannot issue sweat equity shares exceeding fifteen per cent of the issued capital in a year, or shares of the value of five crore rupees, whichever is higher. The issue cannot exceed twenty-five per cent of the issued capital at any time.
The Tax
The sweat equity shares are taxed as a perquisite in the hands of the director or employee at the time of the allotment, and the difference between the fair market value and the consideration is taxable. The subsequent sale attracts capital gains tax.
A technically sound sweat equity issue is supported by a registered valuer’s report, complies with the Section 54 limits, and is approved by the special resolution.
Call to Action
Anuj Desai & Associates advises companies on the issue of sweat equity shares—from the Section 54 limits and the registered valuer valuation to the special resolution, the lock-in, and the tax treatment. If you are planning a sweat equity issue, we can help you structure it.
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