The growth of any company not only depends on its size, market capitalization, and customer base but also on the performance of its employees, directors, and the entire workforce giving its optimum effort. So, it is not only important but a sort of responsibility of the company to provide a decent salary, healthy work environment, and other incentives to the employees. However, it is not only about remuneration for the work that is being done for the company, but making the employees feel that they are part of the organization and not just a worker is equally important. This helps the company to retain employees, boost their morale and offer them a sense of ownership. This is why the corporate sector has come with a better way of offering rewards, and one such popular method is Sweat Equity Shares. This blog will be about Sweat Equity Shares: Overview, How They Work & Issuance. Let us learn the meaning of equity shares in detail.
Table of Contents
Sweat Equity Shares: An Overview
Sweat Equity Shares are defined under Section 2 (88) of the Companies Act, 2013. These shares are offered as rewards to the company’s employees and directors. However, the shares are issued only to specific employees and directors in the following cases:
- Valuable expertise that has helped the company a lot
- Adding value to the business or any contribution made in the line of achieving intellectual property rights
- For the contribution of the employee/director in the handling or completion of a particular project
The primary aim for issuing Sweat Equity Shares is to attract and retain hard-working employees who are expected to provide valuable contributions to the company. This strategy is adopted by most of the companies these days. Issuing sweat equity shares works as a reward not only for the employees or directors to whom they are being issued but to the company as well. How? Let us learn the same in the next section.
Benefits of Sweat Equity Shares for the Employees/Directors
Sweat Equity Shares are a type of non-cash rewards offered to specific employees or directors for certain reasons. These rewards are beneficial for them in the following ways:
- The employee/director to whom the sweat equity shares have been issued gets a part of ownership in the company, and can now have a vote in some of the company’s business operations and decisions.
- Since in essence, the issued ones are like any normal share only, they do carry a value, which is the price of the share. So, the shareholder gains when the price of the company’s share increases over time.
- Not only share’s price, but the shareholder even receives part of the company’s profit in form of dividends.
Sweat equity shares boost employees’ morale, which in turn, is beneficial for the company itself.
Benefits of Issuing them for the Company
Just like the employees/directors, the company which is issuing these benefits from this.
- The first and most important benefit that the company gets in return by issuing these is retention. By offering rewards, it gains the employees/directors’ trust and loyalty, which serves to retain them in the long run.
- By issuing these, the company is actually increasing its market capitalization, which in turn, allows it to invest more and expand the business.
- By motivating employees, the company gets better productivity in the workplace. This also serves are motivation to the other employees who are not being rewarded at that moment and start working enthusiastically after getting attracted to the rewards.
Issuing these are helping businesses around the world in a number of ways.
How Sweat Equity Shares Work and Are Issued
As said above, they are offered as a reward, which means it is not issued to each and every employee or director of the company but only to those whom the company sees as deserving. This means that there is a criterion upon which the company chooses the employees for issuing the shares. Besides, there are also certain rules and regulations related to sweat equity shares, which are as follows:
- They are generally offered at a discount or for any consideration other than cash.
- It is only offered to permanent employees of the company or its subsidiaries/holding companies. In the case of directors, the shares can be offered to both part-time and whole-time directors.
- They come with a lock-in period of three years as per the Company Rules.
- Unlike ESOP, they are directly allotted to the employees.
- The value of the them is determined by a registered valuer.
Significance of Issuing Sweat Equity Shares
Apart from the general benefits, issuing sweat equity shares can help the parties involved in some unique ways as well.
- Startups who can’t afford to provide incentives and cash rewards to their employees, issue sweat equity shares in their names. This helps them in continuing to reward their workforce even when there is a strict budget and tight control on expenses.
- Issuing sweat equity shares often negates the need to raise salary.
- For employees, if they get a pay cut or need some cash, they can redeem their share and use the return to fulfill the urgent needs.
Having learned everything about the benefits, working, and issuance of sweat equity shares, it is equally important to know that these shares also come with some tax obligations if they are allotted or transferred in a certain manner. On the other hand, a company is not allowed to issue more than 15 percent of its existing paid-up equity capital in a financial year or more than INR 5 crores, whichever is higher.
Overall, it can be said that rewarding deserving employees and directors with sweat equity shares have helped companies a lot in retaining their employees for longer periods of time. Also, the benefits received by the shareholders are equally attractive, which means both the parties, i.e; the issuer and the shareholder, are gaining from it. Besides, it is becoming a healthy practice in the corporate world to make employees not only a worker but also a stakeholder in the company, who can participate in the decision-making process and get a sense of ownership at the same time. And in this regard, sweat equity shares have contributed a great deal.