What are Sweat Equity Shares? | Motilal Oswal
What are Sweat Equity Shares? | Motilal Oswal

What are Sweat Equity Shares

Any business views employees as the driving force of its company. It is their diligence and effort that play vital roles in the development and growth of a business. Companies show their appreciation for employees’ work by rewarding staff in various ways. Rewards not only show that you appreciate your staff, but rewards motivate employees to contribute further to the establishment of the business. Sweat equity shares are a kind of reward that companies give employees to show how much they appreciate the hard effort put in by staff. 

  • Detailed Meaning of Sweat Equity Shares
     

The Companies Act, Section 2, of 2013, defines sweat equity shares meaning as shares that are given to particular employees of a given company for reasons that follow:

1. When an employee has contributed exceedingly well to the fruitful conclusion of a project/assignment
2. When an employee has exhibited proficient technical prowess in a field
3. When an employee has added value to the company by way of an outstanding contribution, gaining intellectual rights to property. 

So, what are sweat equity shares? They are company shares that are offered to company employees with the aim of attracting talent and retaining staff that helps the company to prosper. Explaining sweat equity further, you could say that these are shares of the company that employees get as part of the profit the company makes. The company has invested in its employees and employees who contribute well are a return on the company’s investment. Sweat equity is a return on the investment of the employees (as they have put in time and hard work to promote growth of the company/business). 

  • Laws and Reasons Governing Issuance
     

The issue of sweat equity shares is regulated by the Companies Act, 1956, as well as the Companies Act of 2013. Here are detailed reasons why employers offer sweat equity shares, with the strategies involved, plus rules of issue: 

1. If you are an employee being offered sweat equity shares, you don't have to indulge in stock market trading. Sweat equity not only is a reward, but it has a mandatory lock-in time frame of three years, and shares are non-transferrable. Hence, the strategy to retain an employee by issuing sweat equity is effective from many angles. 

2. Companies offer sweat equity to promising employees at the beginning stage of a company’s growth journey. This ensures that employees grow with the company and when they receive the right to partake in it, they refrain from looking elsewhere for employment. 

3. Companies offer sweat equity to employees at a discounted rate. Favoured over ESOPs (Employee Stock Option Plan), sweat equity shares offer the right of being bought and there’s no obligation to purchase them at a set price. 

4. A valuer who is authorized evaluates and decides the fair price of sweat equity shares. What this serves is to reward a member of the staff without too much financial loss to the company.

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