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Pallavi Dadhich

All you need to know about: Difference between ESOP and Sweat equity shares

Difference between ESOP and Sweat equity shares

Introduction

People frequently confuse the concepts of employee stock option plan and sweat equity shares, but it’s important to remember that they are very distinct in numerous ways. A creator of a developing business should constantly look for strategies to attract and keep the best staff. It extends beyond salary and other customary benefits. The success of the business is entirely dependent on its staff. It is possible to reward them for their work by issuing shares to them. The thorough information in this article will help you know more about the difference between ESOP and Sweat Equity Shares.

What is ESOP (Employee Stock Option Plan)?

Employee stock options are defined in Section 2(37) of the Companies Act, 2013. The term “employee stock option” refers to an option granted to executives, directors, or employees of the firm, its holding company, or a subsidiary of the company, which enables the holder to subscribe or purchase shares of the company at a certain price on a future date. A corporation issues it when it needs to raise subscribed capital. The process of issuing ESOPs is governed by Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.

What are Sweat Equity Shares?

Sweat Equity Share is specified in Section 2(88) of the Companies Act, 2013. The term “sweat equity shares” refers to stock that has been issued by a firm to its officers or workers in exchange for services rendered, including the provision of know-how, intellectual property rights, or any other value additions. The issue of sweat equity shares is governed by Rule 8 of the Corporations (Share Capital and Debentures) Rules, 2014.

What is the difference between ESOP and Sweat Equity Shares?

 

Specifications

ESOP (Employees Stock Option Plan)

Sweat Equity Shares

 

Nature

 

Directors and staff are given ESOPs as incentives and as retention plans. They grant employees the right to exercise their option to buy the shares; they do not impose any obligations on them.

 

The ESOP is given to the employees in the form of an option to buy the shares at a certain price at a later date. The employee or director only receives these shares after activating their ESOP grant option.

 

 

   Allotment

 

The ESOP is given to the employees in the form of an option to buy the shares at a certain price at a later date. The employee or director only receives these shares after activating their ESOP (employee stock option plan)

grant option.

 

Sweat equity shares are given directly to employees or directors at a discount or for a consideration other than cash.

 

   Eligibility

 

  1. A firm employee who works permanently both within and outside India.
  2. A company director can be either a full- or part-time director but not an independent director.
  3. A permanent employee or director of a holding company, an affiliated company, or a subsidiary business in India or abroad. The following workers, however, are disqualified:

  • A worker who promotes the business or is a member of the promoter group.

  • A director who directly or indirectly owns more than 10% of the outstanding equity shares of the company, whether directly or through a public company or a relative.
  1. A permanent worker for the company who is located in or outside India.
  2. A company director, whether full-time or not.
  3. A permanent employee or director of a holding company’s subsidiary business in India or abroad.

 

Consideration

 

 

The ESOP (employee stock option plan) consideration must be paid in cash.

 

Sweat equity shares are purchased at a price other than cash or at a discount, which may be partially cash and partly non-cash.

 

Lock-in period

 

The lock-in period is chosen by the company.

 

According to the Companies (Share Capital and Debentures) Rules, the lock-in period is three years.

 

Pricing guidelines

 

The exercise price is set by the firm. The Companies (Share Capital and Debentures) Rules do not provide any pricing standards.

 

Prices are governed by registered valuers.

 

Restrictions

 

The company has no limitations on the issuance of ESOPs.

 

The firm is not permitted to issue sweat equity shares in excess of 15% of the existing paid-up equity share capital in any given year, or shares with an issue value of Rs. 5 crores. Also, no more than 25% of the company’s paid-up equity capital should ever be issued as sweat equity shares.

Conclusion

Employee Stock Option Plans (ESOP) and Sweat Equity Shares are two ways for businesses to give their employees stock options. The company can raise more funds by issuing shares. According to the terms of the Companies Act of 2013 and the Companies (Share Capital and Debentures) Rule,  2014, both ESOP and Sweat Equity Shares are issued. However, in order to issue these shares, companies must adhere to the Securities Exchange Board of India Regulations/Guidelines.

Categories: Articles - Company Law Company law
Tags: difference between ESOP and Sweat Equity SharesEmployee stock option planSweat Equity Shares
Pallavi Dadhich: Pallavi is an ambitious English Literature student with a profound knowledge of content writing. Her SEO skills complement her content writing profile. She has a strong interest in expanding her set of skills by reading and learning. She is eager to experiment with creative writing styles while maintaining strong and informational content.
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