Sweat equity shares are shares issued by a company to its directors or employees at a discount, or for consideration other than cash, in return for their know-how, intellectual property rights or other value additions. They let a company, particularly a start-up, reward the people who build it without paying out cash.

Because sweat equity is an exception to the general bar on issuing shares at a discount under Section 53, the law ties it to a special resolution, independent valuation, quantity limits and a lock-in. This article walks through the full procedure, with the timeline for each step.

Eligibility, Limits and Conditions

Step-by-Step Procedure

Step 1: Valuation and Preparation of Proposal – before the Board Meeting
(Applicable to All Companies)
Section 54 of the Companies Act, 2013 read with Rules 8(6) and 8(7)

• The Articles and authorised capital are required to be checked. Where the authorised capital will be exceeded, it is required to be increased first.
• Valuation reports from a registered valuer are required for the fair price of the shares and for the IPR, know-how or value addition for which the shares are being issued.
• For a listed company, the pricing and conditions in the SEBI SBEB and Sweat Equity Regulations apply.

Step 2: Notice and Agenda for the Board Meeting – at least 7 days before the meeting
(Applicable to All Companies)
Section 173(3) of the Companies Act, 2013 read with SS-1

• Notice of the Board Meeting is required to be given in writing to every director at the address registered with the company, by hand, post or electronic means.
• The notice is required to be accompanied by the agenda, notes on agenda, draft resolutions and supporting papers for the proposed issue of sweat equity shares.
• The notes are required to include the valuation reports, the list of proposed allottees, the number of shares, the price and the limits computation.
• A meeting to transact urgent business may be called at shorter notice, provided at least one independent director (if any) is present. If none is present, the decisions are final only on ratification by at least one independent director.

Step 3: Prior Intimation to Stock Exchanges – at least 2 working days before the meeting
(Applicable in case of Listed Company)
Regulation 29 of the SEBI (LODR) Regulations, 2015

Prior intimation of the date of the meeting at which the Board will consider the proposal for issue of sweat equity shares is required to be given to the stock exchanges. The 2 working days exclude the date of intimation and the date of the meeting.

Step 4: Board Meeting to Approve the Proposal – on the date fixed
(Applicable to All Companies)
Sections 54 and 173 of the Companies Act, 2013 read with SS-1

• The Board is required to approve the proposal, the notice of the general meeting and the explanatory statement, and fix the date of the meeting.
• Where the Nomination and Remuneration Committee is required, its recommendation should be obtained first, as sweat equity issued to directors forms part of their remuneration.

Step 5: Disclosure of Outcome to Stock Exchanges and Website – within 30 minutes of conclusion of the meeting
(Applicable in case of Listed Company)
Regulation 30(6) and 30(8) read with Schedule III of the SEBI (LODR) Regulations, 2015

• The outcome of the meeting, including the proposal to issue sweat equity shares, is required to be disclosed to the stock exchanges within 30 minutes of the conclusion of the meeting, along with the time of commencement and conclusion of the meeting.
• If the meeting ends after trading hours but more than 3 hours before the next trading session starts, the disclosure is required within 3 hours of its conclusion.
• The same disclosure is required to be hosted on the company’s website simultaneously and retained there for at least 5 years (Regulation 30(8)).

Step 6: Minutes of the Board Meeting – draft within 15 days, signed within 30 days
(Applicable to All Companies)
Section 118 of the Companies Act, 2013 read with Paragraph 7 of SS-1

• Draft minutes are required to be circulated to all members of the Board within 15 days of the meeting. Members may give their comments within 7 days of receipt.
• Minutes are required to be entered in the Minutes Book within 30 days of the meeting and signed by the Chairman.
• A copy of the signed minutes is required to be circulated to all members within 15 days of signing.

Step 7: Notice of General Meeting to Members – at least 21 clear days before the meeting
(Applicable to All Companies)
Sections 101 and 102 of the Companies Act, 2013 read with Rule 18 of the Companies (Management and Administration) Rules, 2014 and SS-2

• Notice is required to be sent to every member, the legal representative of a deceased member, the assignee of an insolvent member, every director and the statutory auditors (and the secretarial auditor and debenture trustee, where applicable), by hand, post, courier or e-mail.
• Notice is required to be given at least 21 clear days before the meeting, excluding the day of sending and the day of the meeting, and placed on the company’s website, if any.
• An explanatory statement under Section 102 is required to be annexed, setting out the material facts, including the nature of concern or interest of directors, KMP and their relatives.
• The explanatory statement is required to contain the particulars in Rule 8(2), including the date of the Board Meeting, the reasons for the issue, the class and number of shares, the names and relationship of the allottees, the price, the consideration and valuation, the lock-in and the dilution of EPS.
• The meeting may be called at shorter notice with the consent of a majority in number of members entitled to vote who represent at least 95% of the paid-up share capital carrying voting rights.

Step 8: Submission of Notice to Stock Exchanges – within 12 hours of dispatch of notice
(Applicable in case of Listed Company)
Regulation 30 read with Para A, Part A of Schedule III of the SEBI (LODR) Regulations, 2015

The notice of the general meeting is required to be submitted to the stock exchanges and hosted on the company’s website simultaneously.

Step 9: Newspaper Advertisement of Dispatch of Notice and E-Voting – at least 21 days before the meeting
(Applicable to Listed Companies and Companies having 1,000 or more members)
Section 108 of the Companies Act, 2013 read with Rule 20(4)(v) of the Companies (Management and Administration) Rules, 2014; Regulation 30 of the SEBI (LODR) Regulations, 2015

• An advertisement is required to be published, on completion of dispatch of notice, in one vernacular newspaper and one English newspaper circulating in the district where the registered office is situated.
• The advertisement is required to state the completion of dispatch, the cut-off date, the e-voting period, the manner of voting and the contact details for grievances.
• Listed companies are required to submit a copy of the advertisement to the stock exchanges and host it on their website within 24 hours of publication.

Step 10: Cut-off Date and Remote E-Voting – e-voting open for at least 3 days, closing at 5:00 p.m. on the day before the meeting
(Applicable to Listed Companies and Companies having 1,000 or more members)
Section 108 of the Companies Act, 2013 read with Rule 20 of the Companies (Management and Administration) Rules, 2014

• The cut-off date for determining voting eligibility is required to be not earlier than 7 days before the meeting.
• A scrutiniser is required to be appointed, after obtaining his or her consent, to scrutinise the e-voting and the voting at the meeting.
• Remote e-voting is required to remain open for at least 3 days and to close at 5:00 p.m. on the date preceding the meeting.

Step 11: Holding the General Meeting – on the date fixed
(Applicable to All Companies)
Sections 100, 103 and 108 of the Companies Act, 2013 read with SS-2

• The meeting is required to have the prescribed quorum present: for a public company, 5, 15 or 30 members personally present depending on whether the membership is up to 1,000, between 1,000 and 5,000, or more than 5,000; for a private company, 2 members.
• Members are required to approve the issue by a special resolution. Allotment is required to be made within 12 months of the resolution (Rule 8(3)).

Step 12: Proceedings, Scrutiniser’s Report and Voting Results – proceedings within 12 hours; voting results within 2 working days
(Applicable in case of Listed Company)
Regulations 30 and 44(3) of the SEBI (LODR) Regulations, 2015 read with Rule 20(4) of the Companies (Management and Administration) Rules, 2014

• A summary of the proceedings of the meeting is required to be submitted to the stock exchanges within 12 hours of its conclusion.
• The scrutiniser is required to submit a consolidated report of the votes cast to the Chairman, who declares the result.
• Voting results, along with the scrutiniser’s report, are required to be submitted to the stock exchanges within 2 working days of the conclusion of the meeting and hosted on the company’s website.

Step 13: Minutes of the General Meeting – within 30 days of the meeting
(Applicable to All Companies)
Section 118 of the Companies Act, 2013 read with Paragraph 17 of SS-2

Minutes are required to be entered in the Minutes Book and signed by the Chairman within 30 days of the conclusion of the meeting.

Step 14: Filing of Resolution with ROC – within 30 days of passing the resolution
(Applicable to All Companies)
Section 117 of the Companies Act, 2013

The special resolution is required to be filed in e-Form MGT-14, with the notice and explanatory statement.

Step 15: In-principle Approval of Stock Exchanges – before allotment
(Applicable in case of Listed Company)
Regulation 28 of the SEBI (LODR) Regulations, 2015

In-principle approval of the stock exchanges is required to be obtained before allotting the shares.

Step 16: Board Meeting for Allotment – within 12 months of the special resolution
(Applicable to All Companies)
Sections 54 and 179(3)(c) of the Companies Act, 2013

• The Board is required to allot the sweat equity shares in line with the special resolution, after following the notice, intimation, outcome disclosure and minutes timelines in Steps 2 to 6.
• Public companies are required to file the allotment resolution in e-Form MGT-14 within 30 days (private companies are exempt).

Step 17: Return of Allotment (e-Form PAS-3) – within 30 days of allotment
(Applicable to All Companies)
Section 39(4) of the Companies Act, 2013 read with Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014

A return of allotment is required to be filed with the Registrar in e-Form PAS-3, attaching the Board and special resolutions, the list of allottees and the valuation reports.

Step 18: Share Certificates, Lock-in and Register – certificates within 2 months of allotment
(Applicable to All Companies)
Section 56(4) of the Companies Act, 2013; Rules 8(5) and 8(14) of the Companies (Share Capital and Debentures) Rules, 2014

• Share certificates (or demat credit) are required to be issued within 2 months of allotment, with the 3-year lock-in stamped on the certificate or marked with the depository.
• Stamp duty on issue is required to be paid.
• The Register of Sweat Equity Shares in Form SH-3 and the Register of Members are required to be updated.

Step 19: Accounting and Remuneration Treatment – at the time of allotment
(Applicable to All Companies)
Rules 8(8) to 8(12) of the Companies (Share Capital and Debentures) Rules, 2014; Sections 197 and 198

Where shares are issued for a non-cash consideration, the value is required to be treated as an asset or expensed under the accounting standards. Where sweat equity is issued to a director or manager, it forms part of managerial remuneration under Sections 197 and 198 in the cases specified in Rule 8.

Step 20: Disclosures after Issue – post-issue statement within 7 days; Board’s report
(Applicable to All Companies)
Section 134 of the Companies Act, 2013 read with Rule 8(13); SEBI SBEB and Sweat Equity Regulations

• The Board’s report is required to disclose the class of directors or employees, the number of shares issued, the reasons, the principal terms, the pricing, the percentage of post-issue capital and the diluted EPS.
• A listed company is required to submit a statement of the issue to the stock exchanges within 7 days, obtain listing and trading approval, and place a certificate from the secretarial auditor at the next AGM confirming that the issue complies with the Regulations and the resolution.

Post-Meeting Filings and Disclosures

Penalties for Non-Compliance

Sweat Equity at a Glance

Day 0 = Date of general meeting passing the special resolution