1. Notwithstanding anything contained in section 53, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely:—
a. the issue is authorised by a special resolution passed by the company;
b. the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;
c. not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business; and
d. where the equity shares of the company are listed on a recognised stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.
2. The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank pari passu with other equity shareholders.
Legal Commentary & Landmark Judgments: Section 54
Section 54 regulates the issuance of sweat equity shares to directors or employees at a discount or for non-cash consideration in recognition of technical know-how, intellectual property rights, or value additions.
Sweat equity shares are subject to a mandatory statutory lock-in period of three years from the date of allotment, during which they cannot be transferred.
Section 54 provides a vital mechanism for early-stage companies to retain elite human talent and secure patent or software assignments without depleting cash reserves. Corporate governance audits strictly examine the registered valuer's report to ensure that sweat equity allotments reflect genuine intellectual contributions rather than disguised promoter enrichment.