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Understanding Sweat Equity Shares: A Comprehensive Legal Perspective Under Indian SEBI Law

Sweat equity shares form an integral part of the modern entrepreneurial and startup ecosystem. Rooted in the Securities and Exchange Board of India (SEBI) regulations and the Companies Act, the concept of sweat equity shares in India is robustly governed by legal structures.

Defining Sweat Equity Shares

As per Section 2(88) of the Companies Act, 2013, sweat equity shares are a special category of shares that a company issues to its directors or employees at a discount or for consideration other than cash. The issuance pertains to the provision of know-how or value additions made by them, essentially acknowledging the 'sweat' they have put into the company.

Legal Framework Governing Sweat Equity Shares

The primary legislative sources that govern sweat equity shares in India are the Companies Act, 2013, and the SEBI (Issue of Sweat Equity) Regulations, 2002. The Companies Act offers a generic framework applicable to all companies, whereas the SEBI regulations cater specifically to public companies.

Conditions for Issuing Sweat Equity Shares

The Companies Act and SEBI Regulations lay out specific conditions for issuing sweat equity shares. Some key conditions include:

  1. Minimum Period: As per Section 54 of the Companies Act, 2013, a company cannot issue sweat equity shares until at least one year has passed since it commenced business.

  2. Maximum Limit: SEBI regulations state that the issue of sweat equity shares in a year cannot exceed 15% of the existing paid-up equity share capital or an amount equivalent to Rs. 5 crores, whichever is higher. Moreover, the issuance of sweat equity shares must not exceed 25% of the paid-up capital of the company at any time.

  3. Approval: The issuance of sweat equity shares requires a special resolution passed at a general meeting. Also, the explanatory statement circulated for the proposed resolution should contain the rationale, benefits, and other relevant details about the issue.

  4. Valuation: Sweat equity shares for a startup company must be valued at a fair price by a registered valuer.

Relevant Case Law

In the landmark case of Dharmendra Satyapal Singh Vs. SEBI, the court discussed the legality and importance of sweat equity shares. The Court held that sweat equity shares are a legal and valuable tool for attracting talented employees and directors and can lead to the enhancement of the company's value.

Pricing and Lock-in of Sweat Equity Shares

As per SEBI regulations, the pricing of sweat equity shares should not be less than the higher of the average of the weekly high and low for six months preceding the relevant date or the average of the weekly high and low for two weeks preceding the relevant date. Furthermore, sweat equity shares are subject to a lock-in period of three years from the date of allotment.


Sweat equity shares represent a compelling tool for startups and growing businesses to attract and retain talent by offering a stake in the company’s future success. Governed under the Companies Act, 2013, and the SEBI (Issue of Sweat Equity) Regulations, 2002, these shares acknowledge the non-monetary contributions made by employees and directors to the company's growth.

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