S Ltd., has a paid-up equity share capital of 40 crore. The company is technology based company and is not a startup company. It has previously…

Sweat equity shares are the shares that are issued by a company to its employees or directors at a discount or for consideration, other than cash. These shares are given as a reward for their contribution to the company's growth, such as providing intellectual property, technical expertise, or other valuable services. The holders of sweat equity shares shall rank pari-passu with other equity shareholders. The issuance of sweat equity shares is regulated under section 54 of the Companies Act, 2013, along with the Companies (Share Capital and Debentures) Rules, 2014. Maximum Limit: To prevent excessive dilution of ownership, the law imposes certain limits on the amount of sweat equity shares a company can issue. As per Sub-rule 4 of the Companies (Share Capital and Debentures) Rules, 2014, a company can issue sweat equity shares within the following limits: Annual Limit: The company can issue sweat equity shares up to the higher of the 15% of the existing paid-up equity share capital, or shares of the issue value of rupees five crores.Overall Limit: At any point in time, the total sweat equity shares issued (including all previous issues) cannot exceed 25% of the total paid-up equity share capital of the company. In the present case the paid-up share capital of the company is 40crore. The company has previously issued sweat equity shares worth 8crore and now plans to issue 7crore more this year. So, according to annual limit imposed, 15% of 40crore is 6crore. Hence, company can issue up to 6 crore in sweat equity shares [higher of 6crore and 5crore]. Secondly, as per the overall limit imposed to issue sweat equity shares is 25% of Paid-Up Capital. Therefore, Overall maximum limit = 25% of 40crore = 10 crore Previously the company issued sweat equity shares worth 8crore. Since the company has already issued 8crore worth of sweat equity shares, it cannot issue more than 2crore under the 25% overall limit. However, according to the annual limit, the company can issue shares worth 6crore, but can issue further more upto 2crore in sweat equity shares while staying within overall legal limits. Thus, proposal to issue an additional 7crore this year exceeds the limits. Hence, if the company wants to issue more sweat equity shares, it will have to increase its paid-up equity share capital to expand the permissible limit.