21 Nov 2025
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Procedure for Issue of Equity Shares through Sweat Equity
In today’s competitive and innovation-driven business environment, companies, especially startups, technology businesses and growing enterprises, often depend heavily on the skills, know-how and intellectual property contributed by employees, directors and key partners. Since cash compensation may not always be feasible, the Companies Act, 2013 permits companies to issue Sweat Equity Shares as a legally recognized method of rewarding such value addition.
This blog provides a completely accurate, rule-based and step-by-step procedure for issuing Sweat Equity Shares, fully aligned with the statutory provisions and the compliance steps given under Rule 8.
What Are Sweat Equity Shares?
Section 2(88) of the Companies Act, 2013 defines Sweat Equity Shares as:
“Equity shares issued by a company to its directors or employees at a discount or for consideration other than cash, for providing know-how, intellectual property rights (IPR) or value addition.”
Thus, Sweat Equity is a mechanism to reward skills, innovation, technical contribution and non-cash value that improves the company’s functioning or business performance.
Eligibility to Receive Sweat Equity Shares
(As prescribed under Rule 8)
Sweat Equity Shares may be issued to:
1. Permanent Employees
- Employed in India or outside India
- Includes employees of holding and subsidiary companies
2. Directors
- Whole-time directors
- Part-time directors (including non-executive directors)
3. Key Managerial Personnel (KMP)
- CS, CFO, CEO, MD, etc.
Statutory Conditions for Issuing Sweat Equity Shares
A company must fulfil the following mandatory requirements:
1. Authorisation in Articles of Association (AOA)
- AOA must specifically permit the issue of sweat equity shares.
- If not, the AOA must be amended by passing a Special Resolution before proceeding.
2. Special Resolution in General Meeting
A special resolution must be passed to authorize the issue, specifying: -
- Number of shares
- Current market price
- Class of recipients
- Justification for issue
- Non-cash consideration involved
Validity:
Allotment must be completed within 12 months of passing the special resolution.
3. Valuation Requirements
As mandated under Rule 8:
A Registered Valuer must provide:
- Valuation of fair price of shares, and
- Valuation of IPR/know-how/value addition being received.
A gist of the valuation report must be sent along with the AGM/EGM notice.
4. Pricing
Share pricing must strictly follow the Registered Valuer’s report.
5. Statutory Limits
As per Rule 8(4):
- Annual Limit:
Up to 15% of existing paid-up equity capital or ₹5 crore, whichever is higher
- Overall Limit:
Not more than 25% of paid-up equity capital at any time
- For DPIIT-recognized Startups:
Up to 50% of paid-up capital during the first 10 years
6. Lock-in of Shares
- Sweat Equity Shares must have a mandatory 3-year lock-in period.
- The share certificate must clearly state the lock-in fact and expiry date.
7. Maintenance of Register (Form SH-3)
Companies must maintain a separate register containing:
- Name of allottees
- Number & class of shares
- Value addition/IPR details
- Consideration (non-cash)
- Valuation details
- Lock-in expiry date
The register must be authenticated by the Company Secretary or an Authorized Director.
8. Mandatory ROC Filings
- MGT-14 → within 30 days of passing special resolution
- PAS-3 → within 30 days of allotment
9. Disclosures in Board’s Report
Board Report must disclose:
- Details of sweat equity issued
- Class of recipients
- Justification and value addition
- Pricing and valuation
- Diluted EPS after issue
- Lock-in details
10. Accounting Treatment
As per Rule 8(10):
- If consideration results in an asset → record as an asset
- Otherwise → treat as an expense
If shares are issued to directors, the excess value may be considered managerial remuneration, subject to limits.
Step-by-Step Procedure for Issuing Sweat Equity Shares
Step 1: Preliminary Checks
- Ensure AOA authorizes sweat equity
- Verify eligibility of recipients
- For listed companies → ensure compliance with SEBI (SBEB & Sweat Equity) Regulations, 2021
- Private companies → SEBI regulations not applicable
Step 2: Obtain Valuation Report
A Registered Valuer must determine: -
- Fair value of sweat equity shares
- Fair value of know-how/IPR/value addition
Step 3: Convene a Board Meeting (Section 173)
The Board must:
- Approve the proposal
- Appoint Registered Valuer
- Approve draft notice of EGM/AGM
- Fix date, time and venue for the meeting
- Approve explanatory statement (Rule 8(3))
Step 4: Prepare Explanatory Statement (Rule 8(3) + Section 102)
Must include:
- Date of Board approval
- Reasons/justification
- Class of shares
- Total number of shares
- Terms & conditions
- Valuation price & method
- Details of recipients
- Non-cash consideration
- Managerial remuneration impact (if any)
- Diluted EPS post-issue
- Accounting treatment
Step 5: Send Notice of General Meeting
Send 21 clear days’ notice to:
- Members
- Directors
- Auditors
Attach valuation report summary.
Step 6: Hold the General Meeting
- Pass the special resolution under Section 54.
- File Form MGT-14 within 30 days.
Step 7: Hold Subsequent Board Meeting
Board approves allotment of Sweat Equity Shares.
Step 8: File PAS-3 (Return of Allotment)
Submit within 30 days along with:
- List of allottees
- Valuation report
- Certified copy of Special Resolution
- Board Resolution for allotment
Step 9: Update Register of Members & Form SH-3
Enter all details of recipients and value addition.
Step 10: Issue Share Certificates
Within 2 months of allotment:
- Issue share certificates
- Pay stamp duty
- Mention 3-year lock-in clearly
Benefits of Sweat Equity Shares
- No cash outflow—ideal for startups
- Motivates and retains key talent
- Rewards innovation and IPR creation
- Strengthens ownership culture
- Supports IT, tech, R&D and creative sectors
Conclusion
Sweat Equity Shares are a powerful statutory mechanism to reward contributors who bring strategic value, know-how or intellectual property to a company. However, the issue process is highly regulated, requiring strict adherence to Section 54, Section 2(88), Rule 8, valuation requirements, procedural resolutions, filings and lock-in conditions. If you are seeking for professional help in any legal process, do contact to Remind Legal, we will help you.
By following the legally compliant procedure detailed above, companies can issue Sweat Equity Shares smoothly, transparently and in full compliance with Indian corporate law.
