Sweat Equity shares and ESOPs
Sweat equity shares are issued by the company to its employees on favorable terms in recognition of their work. Many of us believe that both sweat equity shares and Employee Stock Options (ESOPs)are the same but they are two different aspects.
Now a days, companies are finding more ways to retain their employees. These types of incentives have been proven tools used by successful startups.
This blog will help you to learn in-depth concepts of ESOPs and sweat equity shares.
ESOPS
“Employees’ stock option” means the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.
Sweat Equity shares
Sweat equity shares mean equity shares issued by a company 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, by whatever name called.
Comparative Analysis
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Basis |
Sweat Equity shares |
Employees Stock Option (ESOP) |
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Governing Law |
Governed by Section 54 of the Companies Act 2013, read with Rule 8 of Companies (Share Capital and Debenture) Rules 2014. |
Governed by Section 62(1)(b) of the Companies Act 2013, read with Rule 12 of Companies (Share Capital and Debenture) Rules, 2014. |
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Eligibility |
Can be issued to Directors, Employees of the Company. |
Can be issued to Permanent Employees and Directors not holding 10% or more equity shares of the Company. |
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Cannot be issued to: |
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1. i) an employee who is a Promoter or person belonging to a promoter group. |
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2. ii) Independent Director. |
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iii) Directors holding 10% or more equity shares in the Company. |
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Period of Holding |
It shall be reckoned from the date of allotment or transfer of such equity shares. |
It shall be reckoned from the date of Exercise of Options. |
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Consideration |
Can be paid through services rendered or fully non-cash consideration. |
Consideration has to be paid through cash only. |
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Lock-in Period |
It has a compulsory lock-in period of 3 years. |
There is no lock-in period. However, The Company shall have the freedom to specify the lock-in period for the shares issued pursuant to the exercise of an option. |
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Restrictions on Issue |
Sweat Equity Shares cannot be issued for more than 15% of the Existing paid-up equity share capital in a year or shares of the value of 5 crores; whichever is higher. Provided that the issuance of sweat equity shares in the Company shall not exceed twenty-five percent, of the paid-up equity capital of the Company at any time. Provided that the startup company 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. |
There are no such restrictions in the issuance or grant of ESOP. Generally, 10% to 15% of the equity is reserved for ESOPs. |
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Pricing Guidelines |
The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as the fair price giving justification for such valuation. Further, the valuation of IPR, or Know-how, or value additions for which equity shares are to be issued shall also be carried out by a registered valuer with proper justification. And both the valuation reports should be sent to the shareholders along with notice calling the General Meeting. |
There is no pricing guideline defined for the issuance or grant of ESOP. |
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Tax Impact |
Sweat Equity shares allotted to employees can resort to the gifting of the same shares to the members of the family who do not have taxable income and such transfer shall not be charged under the head of Capital Gains. |
The gift of shares allotted under ESOP will be treated as a transfer and shall be charged under the head Capital Gain. |
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Register |
The Company shall maintain a Register of Sweat Equity Shares in Form SH-3. |
The Company shall maintain a Register of Employees Stock Options in Form SH-6. |
By, CA Vishakha Rathi