Rule 8 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 8 governs sweat equity shares issued by a company other than a listed company that is not required to follow the SEBI sweat equity regulations. The shares go to directors or employees at a discount or for consideration other than cash, for know-how, intellectual property rights or value additions. The rule sets the special resolution, the explanatory statement, the limits, valuation, a three-year lock-in, accounting treatment, the Directors' Report disclosures and the SH-3 register.
This article is as amended up to G.S.R. 43(E) dated 21 January 2023 per the MCA e-book. Later amendments should be checked. For employee equity schemes, see our ESOP and employee stock options service.
Sweat equity needs a special resolution that is valid for allotment for twelve months. The annual limit is fifteen percent of existing paid-up equity share capital or shares of issue value rupees five crores, whichever is higher, and the overall limit is twenty five percent at any time; a start-up company may issue up to fifty percent of paid-up capital for ten years from incorporation. Shares are locked in for three years, valued by a registered valuer and recorded in Form SH.3.
Rule 8(1): who may issue, to whom and how
A company other than a listed company, which is not required to comply with the SEBI regulations on sweat equity, shall not issue sweat equity shares to its directors or employees at a discount or for consideration other than cash, for providing know-how or making available rights in the nature of intellectual property rights or value additions, unless the issue is authorised by a special resolution passed in general meeting.
The Explanation defines:
- Employee: (a) a permanent employee of the company who has been working in India or outside India; (b) a director of the company, whole time or not; (c) an employee or director as in (a) or (b) of a subsidiary, in India or outside India, or of a holding company. The words "for at least last one year" were omitted by the Amendment Rules, 2018 of 7 May 2018.
- Value additions: actual or anticipated economic benefits derived or to be derived by the company from an expert or professional for providing know-how or making available intellectual property rights, by the person to whom sweat equity is issued, for which the consideration is not paid or included in the normal remuneration under the contract of employment, in the case of an employee.
Rule 8(2) and (3): the explanatory statement and validity
The explanatory statement annexed to the notice of the general meeting under section 102 contains:
- (a) the date of the Board meeting at which the proposal was approved; (b) the reasons or justification; (c) the class of shares; (d) the total number of shares to be issued as sweat equity;
- (e) the class or classes of directors or employees; (f) the principal terms and conditions, including the basis of valuation; (g) the time period of association of such person with the company;
- (h) the names of the directors or employees and their relationship with the promoter or KMP; (i) the issue price; (j) the consideration, including consideration other than cash;
- (k) the ceiling on managerial remuneration, if any, to be breached and how it is to be dealt with; (l) a statement that the company shall conform to applicable accounting standards; (m) diluted EPS after the issue.
The special resolution is valid for making the allotment within a period of not more than twelve months from the date of passing (sub-rule (3)).
Rule 8(4): the limits
| Limit | What the rule says |
|---|---|
| Annual | Not more than fifteen percent of the existing paid-up equity share capital in a year, or shares of the issue value of rupees five crores, whichever is higher |
| Overall | Proviso: the issuance of sweat equity shares shall not exceed twenty five percent of the paid-up equity capital at any time |
| Start-up company | Further proviso (inserted 19 July 2016): a start-up company, as defined in notification G.S.R. 127(E) dated 19 February 2019 of the Department for Promotion of Industry and Internal Trade, may issue sweat equity shares not exceeding fifty percent of its paid-up capital, up to ten years from the date of its incorporation or registration |
The start-up reference to G.S.R. 127(E) and the "ten years" were substituted by the Amendment Rules, 2020 of 5 June 2020 (earlier text: five years). Read our existing post on sweat equity caps under rule 8 alongside this article; where it differs from the rule as printed here, the rule governs.
Example: Cobalt Software Private Limited, an unlisted company, passes a special resolution to issue sweat equity shares to an engineer director for developing proprietary know-how. The issue for the year stays within the higher of fifteen percent of existing paid-up equity share capital or shares of issue value rupees five crores, and total sweat equity stays within twenty five percent of paid-up equity capital. The allotment is made within twelve months of the resolution.
Rule 8(5) to (9): lock-in, valuation and accounting
- Lock-in (5): shares issued to directors or employees are locked in and non-transferable for three years from the date of allotment; the lock-in and its expiry are stamped in bold or otherwise mentioned prominently on the share certificate.
- Price (6): valued at a price determined by a registered valuer as the fair price, with justification.
- IPR, know-how and value additions (7): valued by a registered valuer who provides a report addressed to the Board with justification.
- Shareholders (8): a copy of the gist, with the critical elements of the valuation report, goes to the shareholders with the notice of the general meeting.
- Non-cash consideration (9): (a) a depreciable or amortizable asset is carried to the balance sheet in accordance with the accounting standards; or (b) otherwise, it is expensed as provided in the accounting standards.
For the Act's provisions on valuers, see our registered valuers section 247 guide.
Rule 8(10) to (12): managerial remuneration and compensation
- (10): the amount of sweat equity shares is treated as part of managerial remuneration for sections 197 and 198 if (a) issued to a director or manager and (b) issued for consideration other than cash that does not take the form of an asset that can be carried to the balance sheet under the applicable accounting standards.
- (11): in the accounting period of issue, the accounting value is treated as compensation to the employee or director in the financial statements if the shares are not issued on acquisition of an asset.
- (12): if issued on acquisition of an asset, the asset's value per the valuation report is carried in the balance sheet and the excess accounting value of the shares is treated as compensation. The Explanation says accounting value is the fair value determined by a registered valuer under sub-rule (6).
Rule 8(13) and (14): disclosure and register
The Board discloses in the Directors' Report for the year of issue: (a) the class of director or employee; (b) the class of shares; (c) the number of shares to directors, KMP or other employees, separately those for non-cash consideration, with the names of allottees holding one percent or more of issued share capital; (d) the reasons; (e) the principal terms including the pricing formula; (f) the total shares arising; (g) the percentage of post-issue paid-up capital; (h) the consideration received or benefit accrued; (i) diluted EPS.
The company maintains a Register of Sweat Equity Shares in Form No. SH.3, enters the particulars forthwith under section 54, keeps it at the registered office or another place the Board decides, and has the entries authenticated by the company secretary or another person the Board authorises. For the Act, see our section 54 guide on sweat equity. For employee stock options, see the article on rule 12, and for the money-for-employees scheme the article on rule 16.
Need help issuing sweat equity?
Sweat equity combines valuation, resolutions, lock-in and accounting. TaxClue can structure the issue, coordinate the valuer and prepare the notice and registers; see our ESOP and employee stock options page.
Key takeaways
- A special resolution authorises the issue and is valid for allotment for twelve months.
- Annual limit: fifteen percent of existing paid-up equity or issue value of rupees five crores, whichever is higher; overall limit twenty five percent.
- Start-ups may issue up to fifty percent of paid-up capital for ten years from incorporation or registration.
- Lock-in is three years and is marked on the certificate.
- Valuation by a registered valuer, with the gist sent to shareholders.
- The Directors' Report discloses nine items and the SH.3 register is maintained.
Read next
- Rule 12: employee stock option schemes
- Rules 10, 12A and 14: infrastructure preference shares, rights notice and bonus
- Sweat equity caps under rule 8
- Section 54 of the Companies Act, 2013: sweat equity
Disclaimer: Based on the Companies Act, 2013 rules named above as consolidated in the MCA e-book (consulted on 3 October 2026), with the later notifications the article names. Later amendments, fees, forms and the Companies Act, 2013 provisions referred to should be checked. This article is general information, not legal advice; check the official text before acting.