Context: Recently, SEBI has given relaxations on the quantum of sweat equity that can be issued by new-age technology companies listed on the Innovators Growth Platform (IGP).

• Sweat Equity shares are equity shares issued to the directors or any other employee of the company, at a reduced price or for considerations (other than cash).

Key Points

• In the case of IGP-listed companies, the yearly limit for sweat equity shares will be 15 per cent, while the overall limit will be 50 per cent of the paid-up capital at any time.
• The overall limit will be applicable for 10 years from the date of the company's incorporation.
• For companies trading on the mainboard, the annual sweat equity ceiling will also be 15 per cent, but the overall limit will be capped at 25 per cent.
• Two sets of regulations were merged into one – SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.
• The companies will have flexibility in switching the administration of their schemes from the trust route to the direct route and vice versa with the approval of the shareholders.

However, this is subject to the condition that the switch is not prejudicial to the interest of the employees.

• Time period for appropriating the unappropriated inventory of the trust has been extended from existing 1 year to 2 years, subject to the approval of the compensation or nomination and remuneration committee for such extension.
• The regulator has dispensed with the minimum vesting period and lock-in period for all share benefit schemes in the event of death or permanent incapacity (as defined by the company) of an employee.
• The lock-in period for sweat equity shares and its pricing formula will be consistent with the ICDR (Issue of Capital and Disclosure Requirements) Regulations.

What is Sweat equity?

• Sweat equity refers to shares issued by a company to its employees for non-cash consideration.
• Sweat equity is generally comes in the form of physical labour, mental effort, and time.
• Sweat equity is commonly found in real estate and the construction industry, as well as in the corporate world—especially for startups.
• The issue of sweat equity shares to employees who belong to promoter or promoter group shall be approved by way of a resolution passed by a simple majority of the shareholders in general meeting.
• Homeowners and real estate investors can use sweat equity to do repairs and maintenance on their own rather than pay for traditional labour.
• In cash-strapped startups, owners and employees typically accept salaries that are below their market values in return for a stake in the company.