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People usually tend to mix the concepts of Sweat Equity Shares and Employees Stock Options, but it should be well kept in mind that both the concepts differ a lot from various aspects. Sweat Equity shares are those shares issued by a company to its directors or employees at a discount or for consideration other than cash, for providing know-how, or IPR, or value additions, by whatever name called. An ESOP (Employees Stock Option Plan) on the other hand is an option given to the employees to buy certain number of shares of the Company at a pre-determined price.

One of the basic differences between Sweat Equity and ESOP is Sweat Equity can be issued for consideration other than cash while ESOP has to be issued only in lieu of cash.

What is Employee Stock Option Plan (ESOP)?

Employee Stock Option Plan (ESOP) simply means a plan where the company grants options to their employees.

While giving ESOP’s option, the selling shareholder and participants obtain numerous tax benefits. It not only keeps worthy employees inspired which helps to grow your company, rather than just accomplish their obligations, it guarantees that you don’t lose them for a number of years.

Applicability

It shall apply to any company whose shares are listed on any stock exchange in India.

What are Sweat Equity Shares & who can issue them?

  • According to the Companies Act, 2013, Sweat Equity Shares (SES) are issued by a company to its directors or employees at a discount or for consideration other than cash for providing know-how or making any value additions which generate synergy to the company.
  • SES is one of the methods of making share-based payments to company employees. Issue of sweat equity allows the company to retain the employees by rewarding the employees for their services. Sweat equity rewards the beneficiaries by giving them incentives for contributing to the development of the company.
  • Under the above-mentioned explanation “Employee” means an employee who has become permanent and has been working in India or outside of India for a minimum of one year; a director of a company who is a whole-time director or part-time; or an employee or a director mentioned before in India or outside India.
  • SES can be issued by any company registered under the Companies Act, 2013. Amendment to the companies act in the year 2017, now allows any company to issue them. Earlier it could be issued only by those companies which had commenced business at least one year prior to the disbursement of such shares.

Major difference between Sweat Equity Shares & ESOPs

Basis Sweat Equity Share Employees Stock Option (ESOP)
To whom it is Issued Sweat equity shares are issued to all kinds of employees who are associated with the company ESOPs are issued to all class of employees except the promoters or anyone belonging to the promoter group
Period of Holding It is 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 only after remaining in business for 1 year No such norm, company can grant ESOP at any point of time after incorporation
Restrictions on Issue* Sweat Equity Shares cannot be issued for more than 15% of the paid-up equity share capital in a year or shares of the value of 5 crores; whichever is higher Company has no such restrictions in issuance or grant of ESOPs
Pricing Guidelines Pricing guidelines are defined for Sweat Equity shares which is required determined by a registered valuer There is no pricing guideline defined for issuance or grant of ESOPs

Takeaway

An employee is the key of the success of every organization and every employee deserves to be compensated for the efforts made by them to make the organization successful in the competitive market and the issue of Sweat Equity shares and ESOP is the best way to compensate them also in order to motivate the morale of the employees and also to retain them for long term.

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