Difference between ESOP and Sweat Equity Shares

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The employees of the company are the important element for the successful operation of the company. The companies can give appreciation to the employee for their efforts by issuing shares to them. This provides a motivation to the employees to work better in the company. It also helps the company to retain their employees in the company for the future prospects.

The Company has two options to issue equity shares to its employees the one is the Employees Stock Option Plan (ESOP) and the second is Sweat Equity Shares. By way of issuing the shares, the companies have an option to increase its capital. The provisions of Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014 are applicable to ESOP and Sweat Equity Shares.

One of the basic differences between Sweat Equity and ESOP is Sweat Equity can be issued for non-cash consideration and ESOP shall issued only in consideration of cash.

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What is Employee Stock Option Plan (ESOP)?

Employee Stock Option Plan (ESOP) means a plan where the company provides options to their employees to purchase the shares of the Company at a pre-determined price. An employee stock option plan (ESOP) is a plan for the benefit of the employee.

Section 2(37) of the Companies Act, 2013 defines the Employee Stock Option Plan (ESOP). The employees stock option means the option gives to the employees, directors or officers of the company to purchase the shares of the company at a predetermined price on a future date. ESOP is the benefit or right provide by the company who wants to increase its share capital.

Applicability of ESOP

The provisions of ESOP are applied to Listed Company whose shares are listed on any stock exchange in India.

To Whom ESOP can be issued?

As per the Rule 12(1) of Companies (Share Capital and Debentures) Rules, 2014 the ESOP can be issued to the following employees-

  • A permanent employee of the company.
  • A Director of the company, a whole-time or part-time director but not include an independent director.
  • A permanent employee or director of a subsidiary company in India/outside India/holding company/an associate company.

Procedure to issue of ESOP

The provisions of issue Employee Stock Option Plan are mentioned in Section 62(1) (b) of the Companies Act, 2013 read with the Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 . The procedures for issuance of ESOP are as follows:

Step 1: Prepare the draft of ESOP as per the Companies Act, 2013.

Step 2: Prepare the notice for the board meeting

Step 3: Send the notice of the board meeting to all the directors

Step 4: Pass the resolution for the issuance of shares through ESOP, determine the price of shares to be issued pursuant to ESOP and call the general meeting to pass a special resolution for issuing ESOP.

Step 5: Send the draft minutes of the board meeting to all the directors within fifteen days of its conclusion and file the MGT-14 form with the Registrar of Companies of passing the board resolution.

Step 6: Send notice of the general meeting to all the directors, auditors, shareholders and secretarial auditors of the company at least before twenty-one days of the date of the meeting.

Step 7: File the special resolution for the issuance of shares under the ESOP.

Step 8: Form MGT-14 form is require to file to the ROC within 30 days of passing the special resolution.

Step 9: Provide options to purchase the shares under Employee Stock Option Plan to employees, directors and officers of the company.

Step 10: Maintain a ‘Register of Employee Stock Options’ in Form No.SH-6 and enter the particulars of the ESOP granted to the employees, directors or officers of the company.

What are Sweat Equity Shares?

Section 2(88) of the Companies Act, 2013 defines Sweat Equity Shares. The sweat equity shares means the shares issued by a company:

  • to its directors or employees
  • at a discount or for consideration other than cash
  • For making rights available in the nature of intellectual property rights or providing know-hows or any providing any value additions in any form.

For issue of sweat equity shares, Listed Company must comply with the Regulations of Securities and Exchange Board of India (SEBI) and the Unlisted Company must comply with the provisions of Section 54 of the Companies Act, 2013 along with the Rule 8 of Companies (Share Capital and Debentures) Rules, 2014.

To whom Sweat Equity Shares are issued

The sweat equity shares can be issued to the following:

  • Permanent employee of the Company whether working in India or outside India;
  • Director of the Company
  • Employee or Director of a Subsidiary /Holding Company of the Company.

Procedure to issue Sweat Equity Shares

To issue Sweat Equity Shares following procedure are require to be followed:

Step 1: Convene a Board Meeting

The Board of Directors of the Company shall conduct a meeting of board of directors to approve the issue of Sweat Equity Shares.

Step 2: Convene Extra-Ordinary General Meeting

The Company shall hold General meeting for getting approval of shareholders by passing the Special resolution.

Step 3: Filing of form MGT-14

After taking the approval from the shareholders the Company must file the Form MGT-14 to the ROC within 30 days from the date of passing of special resolution in the General Meeting along with the attachments as follows:

Attachments of form MGT-14

  • Certified true copy of special resolution along with explanatory statement
  • Shorter Notice consent, if any

Step 3: Allotment of Shares

After filing the Form MGT-14 the company shall make the allotment of sweat equity shares within a period of 12 months for the date of passing of Special Resolution.

Step 4: Filing of form PAS-3

Form PAS-3 has to file to the Registrar within a period of 30 days from the date of allotment of sweat equity shares.

Attachments of form PAS-3

  • Copy of special resolution
  • Copy of Board Resolution
  • List of Allotment
  • Valuation report issued by the Registered Valuer
  • Copy of an agreement for allotting securities for consideration other than cash

Step 5: Issue of Share Certificate

After passing the Form PAS-3 the Company have to issue share Certificate in form SH-1 within a period of 2 months from the date of allotment of shares along with stamp duty.

 Step 6: Disclosure in Board’s Report

The disclosure is required to be made in the Board Report for issuance of sweat equity shares along with the complete details.

What are the differences between Sweat Equity Shares & Employee Stock Option Plan (ESOP)?

Basis Sweat Equity Share Employees Stock Option (ESOP)
Nature Sweat equity shares are issued to the employees or directors as consideration other than cash for providing intellectual property rights or know-how or any value additions to the company. ESOPs are issued in the form of an incentive to the employees to retain them in the company. The ESOP gives a right to the employees to exercise their option to purchase the shares.
To whom it is Issued Sweat equity shares are issued to all the employees of the company. ESOPs are issued to all employees but not include the promoters or promoter group
Period of Holding Period of holding calculated from the date of allotment or transfer of such equity shares It is considered from the date of exercise of the options
Issue Norms Company can issue Sweat Equity shares after the one year of the incorporation Company can issue ESOP at any time after incorporation
Restrictions on Issue* Sweat Equity Shares

cannot be issued more than 15% of the paid-up equity share capital in a year or shares of the value of 5 crores; whichever is higher

There is no such restrictions in issuance of ESOPs
Pricing Guidelines Pricing guidelines are determined by the registered valuer. No pricing guidelines are defined for issuance of ESOP; it is decide by the company.
Lock-in Period It decides by the company. There is a Lock-in Period is for three years.
Consideration The consideration for sweat equity shares is other than cash or at a discount. The consideration have to be paid in cash.

Conclusion

The employees of the company are the important element for the successful operation of the company. The companies can give appreciation to the employee for their efforts by issuing shares to them. This provides a motivation to the employees to work better in the company. It also helps the company to retain their employees in the company for the future prospects. The Company has two options to issue equity shares to its employees the one is the Employees Stock Option Plan (ESOP) and the second is Sweat Equity Shares.

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Neelansh Gupta is a dedicated Lawyer and professional having flair for reading & writing to keep himself updated with the latest economical developments. In a short span of 2 years as a professional he has worked on projects related to Drafting, IPR & Corporate laws which have given him diversity in work and a chance to blend his subject knowledge with its real time implementation, thus enhancing his skills.

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