Microlesson · 5-min read

Sweat Equity Shares (Section 54)

# Sweat Equity Shares — Section 54 of the Companies Act, 2013

## What are Sweat Equity Shares?

Sweat Equity Shares (SES) are equity shares issued by a company to its directors or employees either:

At a discount, or
For a consideration other than cash

They are issued in recognition of the recipient's contribution by way of:

Providing know-how
Making available rights in the nature of intellectual property rights (IPR)
Any value addition to the company

## Conditions for Issue of Sweat Equity Shares

A company may issue SES of a class of shares already issued, subject to the following conditions:

1. Authorisation by Special Resolution (SR) passed by the company.

2. The SR must specify:

Number of shares to be issued
Current market price of the shares
Consideration, if any
Class of directors or employees to whom they are to be issued

3. Listed company → Issue in accordance with SEBI Regulations.

4. Unlisted company → Issue in accordance with Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014.

## Rights of SES Holders

SES holders shall rank pari passu (equal ranking) with other equity shareholders.

## Rule 8 — Conditions for Unlisted Companies

### 1. Who is an 'Employee'?

An employee for the purpose of SES means:

A permanent employee working in India or outside India
A director (whether whole-time or not)
An employee or director of a holding company / subsidiary / associate company

### 2. Validity of Special Resolution

The SR is valid for 12 months, i.e., allotment of SES must be made within 12 months from the date of passing the SR.

### 3. Maximum Issue Size

Period	Maximum Issue Size
In a Financial Year	15% of paid-up equity share capital (PUESC) OR ₹5 crore by issue value (whichever is higher)
At any time (cumulative)	Up to 25% of PUESC
Start-up companies (first 10 years)	Up to 50% of PUESC

### 4. Lock-in Period

SES shall be locked in for 3 years from the date of allotment.

### 5. Issue Price

Determined by a Registered Valuer (RV)
A valuation report must be submitted to the Board of Directors (BOD).

### 6. Accounting Treatment

Where SES is issued for consideration other than cash:

If consideration takes the form of a depreciable/amortisable asset → carry to Balance Sheet as per Accounting Standards (AS)
If not → Expense out in P&L as per AS

### 7. Register of Sweat Equity Shares

Maintained in Form SH-3
Kept at the Registered Office or such other place as the BOD may decide
Entries authenticated by the Company Secretary or other authorised person

### 8. Disclosure

Details of SES issued must be disclosed in the Board's Report.

Worked example

### Example 1

Example 1 — Maximum Issue Size per FY:

XYZ Ltd has a PUESC of ₹100 crore. The maximum SES it can issue in one FY = 15% of ₹100 crore = ₹15 crore (since 15% > ₹5 crore). Cumulatively, total SES outstanding cannot exceed 25% of PUESC = ₹25 crore.

### Example 2

Example 2 — Start-up Exception:

A recognised start-up incorporated 4 years ago has PUESC of ₹10 crore. It may issue SES up to 50% of PUESC = ₹5 crore (since it is still within the first 10 years from incorporation). This relaxation continues only until the 10th year.

### Example 3

Example 3 — Lock-in:

Mr. A, an employee, is allotted SES on 1st April 2025. He cannot transfer these shares before 1st April 2028 due to the 3-year lock-in.

### Example 4

Example 4 — Accounting (Non-cash consideration):

ABC Ltd issues SES worth ₹50 lakh to its CTO in exchange for a patent (IPR). Since the patent is an amortisable intangible asset, ₹50 lakh is capitalised in the Balance Sheet. If, instead, it were issued for general 'value addition' (not an identifiable asset), the amount would be expensed in the P&L as per AS.

⚠️ Common exam mistakes

Confusing Sweat Equity Shares with ESOPs — SES involves issue at discount or for non-cash consideration to recognise past contributions; ESOPs are options granted for future service.
Forgetting that SR validity is only 12 months — allotment must be completed within this period, else a fresh SR is required.
Applying the 25% overall cap to start-ups within first 10 years — they enjoy a 50% overall cap.
Misreading the FY cap — it is the higher of 15% of PUESC or ₹5 crore by issue value (subject to overall 25% cumulative cap).
Forgetting the lock-in period of 3 years from allotment.
Issuing SES without valuation by a Registered Valuer — the valuation report to BOD is mandatory.
Not maintaining Register of SES in Form SH-3 or omitting disclosure in the Board's Report.

Bare-Act text Section 54 read with Rule 8 · Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014 · click to expand

Section 54 — A company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled: (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 SEBI 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. The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued and the holders of such shares shall rank pari passu with other equity shareholders.

← Previous

Sources and Manner of Redempti

Time Period for Delivery of Sh

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →