India Allows Startups To Issue Sweat Equity Within 10 Years Of Incorporation
Employees work at a startup in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

India Allows Startups To Issue Sweat Equity Within 10 Years Of Incorporation

The government has allowed Indian startups to issue sweat equity within 10 years from their incorporation or registration.

The amendment is aimed at empowering startups to help them attract and retain key talent, experts said. Startups generally issue sweat equity to their directors or employees against any intellectual property or know-how provided by them. The law allows companies to issue such shares at a discount or for a consideration other than cash. The earlier limit for issuing sweat equity was five years.

The move comes at a time when Indian startups are facing declining revenues, slowdown in funding and severe liquidity pressure due to a slowing economy caused by the outbreak of Covid-19 and a subsequent national lockdown that shut all but essential businesses and decimated consumption.

The Ministry of Corporate Affairs said in a notification on its website on Monday that companies that qualify as startups under Department for Promotion of Industry and Internal Trade’s 2019 policy will be allowed to issue sweat equity up to a decade from the date of their incorporation or registration.

Sanjay Nagra, partner at Khaitan & Co., said the move is aimed at giving more flexibility to startups intending to pay in the form of equity. The amendment, which is in line with the current DPIIT definition of startups, comes as relief for startups facing severe cash crunch, he said.

“This will allow even those startups that are more than five years old to take the benefit of issuing sweat equity shares up to 50% of their paid-up capital which is otherwise limited to 25% for other companies,” he said.

The move will be extremely useful for startups which intend to issue equity in a staggered manner or for projects spanning over a longer term, commensurate with contribution by key employees for whom such shares are intended, Hemang Parekh, partner at DSK Legal, told BloombergQuint.

He said companies may prefer sweat equity over employee stock options, as stock options cannot be issued to promoters and vest in the future. The extended timeline can benefit startups in technology sector which sees rapid change in technology necessitating hiring of key employees who bring in know how or intellectual property, Parekh said.

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