Keeping a Formidable Team via Sweat Equity Shares
A reward is always up for grabs for those who work hard. Regardless of the position, you’re in or the task one is told to do. Rewards, however, need not be in the form of cash all the time, but it would soon enough.
In the corporate environment, those who excel get recognized for their effort. Recognition could be in form of a citation, a pay hike, a vacation package, promotion, or sweat equity shares.
Of the five, sweat equity shares are the least comprehensible but most enticing.
Deserving Employees as Part Owner
While most at the top level of the corporate structure are yearning to make the most out of their company contribution by getting a slice of company stakes, not all employees are aware of the advantages of being a “part-owner” of the company where they work.
Lowly employees are not even thinking of being such as shares of stocks are often beyond their means.
However, a quick glance at what sweat it is all about would somehow raise their level of hard work. Likewise, sharpen their brains to be able to contribute something that would make their presence felt in the company.
Sweat Equity Shares, Up-close
Sweat equity shares are one of the many forms of rewards that companies bestow on deserving employees. That is to say, from the top down to the lowest position. It is however important to note that sweat equity shares are neither free nor a gift.
Sweat equity shares are offered on favourable terms, for a job well done or for being consistently dependable.
Sweat equity shares are basically an easy way to make share-based payments to employees of the company. This makes employees stay where they are. In other words, working for the company where their contributions are recognized and appreciated, in the form of incentives.
Interestingly, it may also be used to lure in somebody with exceptional skill. Similarly, the one who is deemed capable of propelling the business.
More Reasons to Work Harder
With a company providing room to grow for those who do good, work hard and strive more than what they are being paid for, employees are enticed to make a grand display of what they’re made off. They are hoping to get a shot at becoming shareholders too, like their bosses.
In India, its Companies Act of 2013, specifically Section 2 (88), sweat equity shares is defined as discounted equity shares issued by a company to its directors or employees. It could also be for consideration, other than cash, for waiving intellectual property rights. This is for an idea that has made or seen to make wonders for the company business.
Eligible Company Employees
To quell issues as to who is eligible to receive sweat equity shares, the Companies Act of 2013 has issued categorical descriptions of an “employee.” Under Rule 8(1) of the Companies Act of 2013, an employee means:
- One with permanent status or those who have been working with the company for at least a year – in India or elsewhere.
- A Company Director, regardless of how long he or she has been working with the company.
- An employee or a Company Director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company.
Basis and Limitations in Issuances
Other than those who have shown how good they are, sweat equity shares are also offered to lure a promising individual to hop in.
Interestingly, the value of sweat equity shares largely depends on the anticipated yield and benefits that the company stands. This stands to get from a “promising” expert or professional gifted with skills and knowledge required to boost business.
The Companies Act of 2013 refers to it as “Value Addition.” The sweat equity shares basically represent a perk outside the salary offer stipulated in the employment contract.
Value Addition, however, is covered by government guidelines requiring companies:
- At least one year in actual business operations before making an offer.
- Special board resolution authorizing such offer.
- Separate board resolution specifying 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.
- Special resolution authorizing validity in the issuance of sweat equity shares, for purposes of facilitating allotment within a period of not more than twelve months from the date the resolution was passed.
- Prominent mention of the words “non-transferrable/ locked-in” in the sweat equity shares issued to directors or employees for a period of three years from the date of allotment.
- Stock Exchange-sanctioned issuance of equity shares in accordance with its regulations.
- Issuance of sweat equity shares should not go beyond 15% of the existing paid-up equity share capital in a year.
- Issuance of sweat equity shares should not exceed 25% of the paid-up equity capital of the company.
Oddly though, start-up companies may issue sweat equity shares not exceeding 50% of its paid-up capital up to five years from the date of its incorporation or registration.
The Need for Professionals
Whether issuance of sweat equity shares is for the purpose of rewarding deserving people or just to lure in somebody promising to work for you, it is best to consult business advisors with a solid portfolio in India company formation.
Consider 3E Accounting whose extensive experience yields a proven track record of excellence in delivering results. We can help you do things right, for less.
For more information, please contact us.