# Sweat Equity Shares — Section 2(88)

Sweat equity shares are equity shares issued by a company to its directors or employees at:

a discount, OR
for consideration other than cash,

for providing:

their know-how, OR
making available rights in the nature of Intellectual Property Rights (IPR), OR
value additions (any other contribution).

## Key elements

Element	Meaning
Who can receive	Directors or employees of the company (not outsiders).
Consideration	Either at a discount OR non-cash (e.g., for IP/know-how/value addition).
Purpose	To reward those who contribute know-how, IPR, or other value additions — beyond normal salary.

## Why a separate definition?

Normally, shares cannot be issued at a discount (prohibited by Sec 53). Sweat equity is the specific carve-out that lets a company issue equity at a discount or for non-cash consideration, governed by Section 54 and the Companies (Share Capital and Debentures) Rules, 2014.

## Compare with ESOP

ESOP = an option to buy shares at a future date at a pre-determined price (often discounted to FMV). The employee pays cash on exercise.
Sweat Equity = direct issue of equity for value rendered (know-how/IPR) — often without cash, or at a discount.

## Practical use cases

A tech start-up issues sweat equity to its co-founder CTO in exchange for transferring his patented software algorithm to the company.
A pharma company issues sweat equity to a senior R&D scientist (employee) in recognition of a breakthrough formulation he developed.

Worked example

### Example 1

Example. AlphaTech Pvt Ltd wishes to reward its CTO (a director) for inventing a software algorithm that he has assigned to the company. The Board, after special resolution under Sec 54, issues 10,000 equity shares of Rs.10 each at a discount of Rs.2 to the CTO. Question: Is this sweat equity? Yes — shares issued at a discount to a director for know-how / IPR fits exactly within Sec 2(88).

### Example 2

Counter-example. A 10% discount issue to all retail subscribers of an IPO would NOT be sweat equity — the recipients are not directors/employees, and it is not for know-how/IPR/value addition.

⚠️ Common exam mistakes

Confusing sweat equity with ESOP — ESOP is a future option; sweat equity is an immediate issue.
Thinking sweat equity can be issued to anyone — only directors and employees qualify.
Missing that sweat equity is the only legal way (with Sec 54 compliance) to issue equity at a discount.
Treating bonus shares as sweat equity — bonus shares are issued out of reserves to existing shareholders, not in exchange for know-how/IPR.

Bare-Act text Section 2(88) · Companies Act, 2013 · click to expand

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, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

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Sweat Equity Shares [Sec 2(88)]

Worked example

⚠️ Common exam mistakes