Equity & ESOP

Sweat Equity Resolution

Sweat equity is shares issued to a director or employee at a discount, or for consideration other than cash, in return for know-how, intellectual property, or value added. It is tightly limited: a special resolution valid for a limited period, a registered-valuer report, statutory ceilings on how much may be issued, and a lock-in. Confirm every limit before drafting — this is not a substitute for a stock option scheme.

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Resolutions for the Issue of Sweat Equity Shares

[COMPANY NAME]

Item	Detail
Company	[COMPANY NAME], CIN [CIN]
Class of shares	Equity shares of face value ₹ [FACE VALUE] each
Number proposed to be issued	[NUMBER]
Proposed allottees	[NAMES AND DESIGNATIONS]
Consideration	[For consideration other than cash, being ______ / At a discount to fair value / Partly for cash and partly for consideration other than cash]
Current paid-up equity share capital	[NUMBER] shares, ₹ [AMOUNT]
Sweat equity already issued	[NUMBER] shares, being [PERCENTAGE] per cent of the paid-up equity capital
Startup recognition	[Recognised by the Department for Promotion of Industry and Internal Trade, number ______ dated ______ / Not a recognised startup]
Validity of the special resolution	The allotment must be completed within the period permitted from the date of passing

Part A — Board Resolution

Certified true copy of a resolution passed at the meeting of the Board of Directors held on [DATE].

The Chairperson placed before the Board the proposal to issue sweat equity shares to the persons named above in recognition of [DESCRIBE THE VALUE ADDITION, KNOW-HOW OR INTELLECTUAL PROPERTY PROVIDED], together with the valuation reports referred to below and the computation at Annexure A showing that the proposed issue is within the statutory limits. After discussion, and [NAME], being an interested director, having disclosed his or her interest and [withdrawn from the meeting / abstained], the Board passed the following resolutions:

"RESOLVED THAT the proposal to issue [NUMBER] sweat equity shares of the Company of face value ₹ [FACE VALUE] each to the persons named in Annexure B, on the terms set out in the explanatory statement placed before the Board, be and is hereby approved, subject to the approval of the members by special resolution.

RESOLVED FURTHER THAT the valuation report dated [DATE] issued by [NAME], a registered valuer bearing registration number [NUMBER], determining the fair value of the equity shares of the Company at ₹ [VALUE] per share, and the valuation report dated [DATE] issued by [NAME], a registered valuer, on the valuation of the intellectual property, know-how or value addition for which the sweat equity shares are proposed to be issued, be and are hereby taken on record.

RESOLVED FURTHER THAT an [extraordinary] general meeting of the members be convened on [DATE] at [TIME] at [PLACE], that the notice together with the explanatory statement setting out the particulars required be and is hereby approved, and that the Company Secretary or any director be authorised to issue it.

RESOLVED FURTHER THAT the Company Secretary or any director be and is hereby authorised to make the filings required, to maintain the register of sweat equity shares in the form prescribed, to make the disclosures required in the Board’s report, and to do all such acts as may be necessary to give effect to these resolutions."

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Notes for use

These notes accompany the template and explain the drafting choices, the compliance points and the mistakes most often made with this document. They appear as a final page in the Word file, intended to be deleted before the document is executed.

Sweat equity is not an alternative to a stock option scheme

It exists for a narrow purpose: rewarding a director or employee for know-how, intellectual property, or value added to the company, by issuing shares at a discount or for consideration other than cash. It is constrained by annual and cumulative ceilings, a valuation requirement, a lock-in, and a special resolution with a limited life. Where the objective is ordinary employee incentivisation, an option scheme is the right instrument and is far less restricted.

Confirm the limits before drafting, not after

There is a cap on the amount of sweat equity that may be issued in a year and an overall cap on the cumulative total, expressed as percentages of paid-up capital, with a monetary alternative for the annual cap. A recognised startup is permitted a substantially higher cumulative ceiling for a period from incorporation. All of these figures and periods have been changed more than once. Annexure A requires the basis to be stated for exactly that reason — do not carry forward a number from an old precedent.

Two valuations, not one

A registered valuer must value the shares, and separately must value the intellectual property, know-how or value addition being received as consideration. Companies routinely obtain the first and overlook the second, which leaves the consideration unsupported and the issue vulnerable. Both reports must be placed before the Board and the members and referred to in the explanatory statement.

Describe the value addition specifically

A resolution reciting that shares are issued "in recognition of services rendered" is weak. The statutory purpose requires know-how, intellectual property, or a value addition that can be identified and valued. Describe what was actually provided — the patent, the software, the process, the customer relationships — in Annexure B, and make sure the valuer’s report addresses the same thing.

The special resolution has a limited life

The allotment must be completed within the period permitted from the date the resolution is passed. A resolution passed and then acted on a year later, after negotiations, is spent. Where the timetable slips, pass a fresh resolution rather than relying on the original.

Lock-in and the certificate legend

Sweat equity shares are locked in for a prescribed period from allotment. The lock-in should be recorded in the resolution, noted in the register of members, and printed as a legend on the share certificate. A transfer during the lock-in is void, and a certificate without the legend makes such a transfer more likely.

Tax falls on both sides

Shares issued at a discount to fair value are a perquisite in the hands of the recipient, taxable as salary income, with the company obliged to withhold. Where the consideration is intellectual property transferred by the recipient, that transfer may itself be a taxable event for the recipient. Both sides need advice before the resolution is passed, not after allotment.

Interested directors

Where a proposed allottee is a director, that director is interested in the resolution and the minutes must record the disclosure and whether the director withdrew, abstained or participated. Where all the directors are proposed allottees, take advice on how the Board can validly approve the proposal at all.

Register and disclosure

A register of sweat equity shares must be maintained in the prescribed form, and particulars of the issue must be disclosed in the Board’s report for the year. Both are commonly omitted, and the register is one of the documents diligence asks for by name.

Consider whether an option would do the job

Before using sweat equity, ask whether the same commercial outcome could be achieved by granting options at a nominal exercise price under an existing scheme. In most cases it can, without the ceilings, the lock-in, the dual valuation, or the limited-life resolution. Sweat equity is the right answer mainly where genuine intellectual property is being transferred to the company in exchange for shares.

Founders and promoters

Sweat equity may be issued to promoters and to directors, which is one of the few respects in which it is wider than the option framework. That is often the reason it is chosen. It is also the reason it attracts scrutiny — an issue of discounted shares to the people approving the issue. Document the value addition and the valuations thoroughly.

Current as of

Reflects Indian law current as of {{DATE OF USE}}. The annual and cumulative ceilings, the startup relaxation and its duration, the lock-in period, the validity of the special resolution and the prescribed register have each been amended — confirm every one with a company secretary before the Board meeting.

This is a ready-to-use template provided for convenience. Laws and requirements change, and every situation is different — please have it reviewed by a qualified professional (a lawyer, company secretary, or chartered accountant as relevant) before you rely on it.