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What is Sweat Equity?

Sweat Equity Rules: SEBI:

The Securities and Exchange Board of India (SEBI) has brought into effect the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. The regulations have widened the scope of employees who can be offered stock (equity) options.

  • SEBI has merged the SEBI (Share Based Employee Benefits) Regulations, 2014 (SBEB Regulations) and the SEBI (Issue of Sweat Equity) Regulations, 2002 (Sweat Equity Regulations).
  • SEBI is a statutory body established in accordance with the provisions of the SEBI Act, 1992. Its basic function is to protect the interests of investors in securities and to regulate the securities market.

Sweat Equity:

  • Sweat equity is a non-monetary contribution that the individuals or founders of a company make towards the company. Cash-strapped startups and business owners typically use sweat equity to fund their companies.
  • As per Section 2(88) of the Companies Act, 2013 sweat equity shares means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash.
  • Issued for: It will be issued for providing the know-how or making available rights in the nature of intellectual property rights or value additions.
  • Maximum Limit:The maximum yearly limit of sweat equity shares that can be issued by a listed company has been prescribed at 15% of the existing paid-up equity share capital within the overall limit, not exceeding 25% of the paid-up capital at any time.
  • Further, in case of companies listed on the Innovators Growth Platform (IGP), the yearly limit will be 15% and overall limit will be 50% of the paid-up capital at any time. It will be applicable for 10 years from the date of the company’s incorporation.
  • SEBI in 2019 launched IGP erstwhile known as ‘Institutional Trading Platform’ for listing of issuers which are in intensive use of technology, information technology, intellectual property, data analytics, biotechnology or nano-technology to provide products, services or business platforms with substantial value addition.
  • This proposal will benefit all new start-up companies seeking listing on the IGP platform.