Sweat equity shares for startups

MCA has issued a notification dated 5th June, 2020 regarding sweat equity shares for start-ups as follows.

Start-ups as defined in DIPP notification dated 19th february, 2019 i.e.

An entity shall be considered as a Startup:
i. Upto a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
ii. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees.
iii. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

Such start-ups may issue sweat equity shares not exceeding 50% of its capital upto 10 years from the date of its incorporation or registration as the case may be.

Earlier it was for a period of 5 years but with the DIPP definition of start-up giving it a leeway upto 10 years, this was to align with the DIPP rules.

Non start-up companies can issue sweat equity shares upto 15% of its paid up capital in a year or upto Rs.5 crores value of sweat equity shares, whichever is higher. However, the total issue of sweat equity shares in a non start up company cannot exceed 25% of its paid up capital. These two limits i.e. the per year lower limit and the overall limit is not there in a start up company.

The DIPP circular regarding start-ups can be found here


MCA circular as above can be found here

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