Write a note on Sweat Equity


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Sweat Equity :

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1.      ‘Sweat Equity’ means equity shares issued by the company to employees or directors at a discount or for consideration other than cash for making available know how in the nature of intellectual property rights or value additions, by whatever name called.

2.      It can be issued by All Company(s), whether private, public, listed or not-listed can issue Sweat Equity Shares. “Sweat Equity Shares” mean equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

3.      Sweat equity is a term that refers to a party’s contribution to a project in the form of effort – as opposed to financial equity, which is a contribution in the form of capital.

4.      The equity that is created in a company or some other asset as a direct result of hard work by the owner(s). For example, the work you might put into rebuilding the engine on your 1968 Mustang to increase its value would be considered sweat equity. Sweat equity shares are equity shares issued by a company to its employees or directors at a discount, or as a consideration for providing know-how or a similar value to the company.

5.      A company may issue sweat equity shares of a class of shares already issued if these conditions re met:

(a)     The issue of sweat equity shares should be authorized by a special resolution passed by the company in a general meeting.

(b)     The resolution should specify the number of shares, current market price, consideration, if any, and the section of directors / employees to whom they are to be issued as on the date of issue, a year should have elapsed since the company was entitled to commence business.

6.      The sweat equity shares of a company whose equity shares are listed on a recognised stock exchange should be issued in accordance with the regulations made by the Securities and Exchange Board of India (SEBI)

7.      In the case of a company whose equity shares not listed on any recognised stock exchange, sweat equity shares can be issued to accordance with such guidelines as may be prescribed.

8.      In the case of unlished companies, sweat equity shares cannot be issued before one year of commencement of operations. Moreover, there is a cap of 15 percent on the number of sweat equity shares that can be issued without a specific central government approval.

9.      Sweat equity shares are no different from employee stock options with a one year vesting period. It is essential when a company is formed, to assure the financial investors that the knowhow providers will stay on, or for a start-up with limited resources to attract highly-qualified professionals to join the team as long-term stakeholders.

10.    These shares are given to a company’s employees on favourable terms, in recognition of their work. Sweat equity usually takes the form of giving options to employees to buy shares of the company, so they become part owners and participate in the profits, apart from earning salary.

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