## Sweat Equity Shares — Section 54

### What are sweat equity shares?

Sweat equity shares are equity shares issued by a company to its directors or employees at a discount, or for consideration other than cash, in recognition of:

providing know-how,
contributing intellectual property rights (IPR), or
providing value addition by any other means.

The concept rewards 'sweat' — intellectual or entrepreneurial effort — with ownership in the company.

### Who qualifies as an 'employee'?

A director or permanent employee of:

The company itself, OR
Its holding company, OR
Its subsidiary company.

### Conditions for issue

All four conditions must be satisfied:

#	Condition
1	Shares of that class are already issued by the company (you cannot create a new class as sweat equity at first instance).
2	The issue is authorised by a Special Resolution (SR) — allotment must be made within 12 months of passing the SR.
3	The resolution specifies the number of shares, current market price, consideration (if any), and the director/employee to whom the shares are to be issued.
4	Issue is in accordance with — for listed companies: SEBI Regulations; for others: Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014.

### Status of sweat equity shares

All rights, limitations, restrictions and provisions that apply to equity shares apply to sweat equity shares as well. Holders rank pari passu with other equity shareholders.

### Limits on issue

#### Per-year limit

Maximum sweat equity that can be issued in a single year is the HIGHER of:

15% of existing paid-up equity share capital, OR
Shares of issue value of ₹ 5 crores.

#### Overall (lifetime) limit

Total sweat equity shares issued (including all previous issues) shall not exceed 25% of paid-up equity capital at any time.

#### Startup exception

A startup which is a private company can issue sweat equity shares up to 50% of paid-up capital — and this relaxation is available for up to 10 years from incorporation.

### Lock-in

Sweat equity shares are locked in (non-transferable) for 3 years from the date of allotment.

### Valuation

Item	How valued
Sweat equity shares themselves	At fair price determined by a Registered Valuer.
Know-how / IPR / value addition received as consideration	Valuation by a Registered Valuer who provides a report to the BOD.

### Accounting treatment when issued for non-cash consideration

Nature of asset received	Treatment in books
Depreciable or amortizable asset	Carried to the balance sheet as an asset
Otherwise	Recorded as an expense

### Disclosure and record-keeping

BOD report of the year in which the sweat equity shares are issued must disclose details of the issue.
Maintain a Register of Sweat Equity Shares in Form SH-3 at the registered office (or such other place as the BOD decides).

Worked example

### Example 1

Example (calculation): XYZ Tech Ltd has a paid-up equity capital of ₹ 20 crores and plans to issue sweat equity shares worth ₹ 4 crores to reward key software developers.\n\nStep 1 — pass the SR specifying number of shares, market price, consideration and the directors/employees concerned.\n\nStep 2 — check the per-year limit. Higher of:\n- 15% × ₹ 20 crores = ₹ 3 crores, OR\n- ₹ 5 crores.\nThe higher figure is ₹ 5 crores. So in one year XYZ may issue up to ₹ 5 crores worth.\n\nStep 3 — check the overall 25% cap. 25% × ₹ 20 crores = ₹ 5 crores total over the life of the company.\n\nThe proposed ₹ 4 crore issue fits inside both limits. XYZ may proceed, but allotment must be completed within 12 months of the SR.

### Example 2

Example (lock-in): Mr A, an employee of ABC Ltd, was allotted sweat equity shares on 1 January 2026. He wishes to sell them in March 2028. He cannot — the 3-year lock-in expires only on 1 January 2029.

### Example 3

Example (startup): PQR Pvt Ltd is a recognised startup, 4 years old, with paid-up capital of ₹ 2 crores. It can issue sweat equity up to 50% of paid-up capital, i.e., ₹ 1 crore — far more than the standard 25% cap of ₹ 50 lakhs.

### Example 4

Example (accounting): If sweat equity worth ₹ 50 lakhs is issued in exchange for software (an intangible amortizable asset), the ₹ 50 lakhs is capitalised on the balance sheet. If it is issued in exchange for management consultancy services that are immediately consumed, the ₹ 50 lakhs is charged as an expense.

⚠️ Common exam mistakes

Taking the LOWER of the 15% / ₹ 5 crore figures for the per-year limit — the law says HIGHER.
Confusing the 25% lifetime cap with the per-year cap.
Believing the startup 50% relaxation is available to ALL startups — it is restricted to startups that are PRIVATE companies, for up to 10 years from incorporation.
Assuming the 12-month allotment window can be extended — it cannot; a fresh SR is required.
Forgetting the 3-year lock-in from ALLOTMENT (not from board approval or from end of FY).

Bare-Act text Section 54 · Companies Act, 2013 · click to expand

Notwithstanding anything contained in section 53, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely: (a) the issue is authorised by a special resolution passed by the company; (b) the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued; (c) where the equity shares of the company are listed on a recognised stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.

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Issue of Sweat Equity Shares [Section 54]

Worked example

⚠️ Common exam mistakes