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Sweat Equity
Valuation

Sweat equity shares are a special type of shares given by a company to its directors or employees. These shares are offered at a lower price or in return for non-cash contributions like skills, intellectual property, or other valuable inputs.  Sweat Equity Share is defined under Section 2(88) of the Companies Act, 2013. The sweat equity shares mean shares issued by a company to its directors or employees for non-cash consideration or at a discount for making rights available in the nature of intellectual property rights or providing know-hows or any providing any value additions in any form. Rule 8 of Companies (Share Capital and Debentures) Rules, 2014 regulates the procedure of issue of sweat equity shares.

Sweat Equity Issuance by Unlisted Companies

Compliance with Companies Act, 2013:
  • small-tic Governed by Section 54 (Issue of Sweat Equity Shares) along with applicable rules.
Valuation Report Requirement:
  • small-tic A valuation report from a Registered Valuer accredited under the Companies (Registered Valuers and Valuation) Rules, 2017, is mandatory.
  • small-tic The valuation of intellectual property rights or of know how or value additions for which sweat equity shares are to be issued.
  • small-tic As per the Income Tax Rules, 1962, if the shares are not listed on a stock exchange, the “Merchant Bankers” must establish the fair value of such sweat equity shares as of the given date.

Preferential Allotment for Listed Companies

Governed by:
  • small-tic The process is regulated by the Securities and Exchange Board Of India (Share Based Employee Benefits And Sweat Equity) Regulations, 2021.
Valuation Report Requirement:
  • small-tic The valuation of the know-how or intellectual property rights or value addition shall be carried out by a Merchant Banker.

Key Points to Consider

01

Which is the Governing Law for Unlisted Companies?

Companies Act 2013 and Income Tax Act 1961

02

Which is the Governing Law for Listed Companies?

Securities and Exchange Board Of India (Share Based Employee Benefits And Sweat Equity) Regulations, 2021.

03

Who Does it?

Registered Valuer and Merchant Banker

04

When it is required?

At the time of Issuance

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