Sweat Equity Shares vs. Employee Stock Option Plan (ESOP)
- Blog|Company Law|
- 3 Min Read
- By Taxmann
- |
- Last Updated on 28 March, 2022
Latest from Taxmann
Table of Content
- Sweat Equity Shares
- What is the difference between Sweat Equity Shares vs ESOP?
- What is the difference between Sweat Equity vs Issue of Capital on a Preferential Basis?
1. Sweat Equity Shares
According to section 2(88), sweat equity shares mean such equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.
According to Explanation to rule 8(1) of Companies (Share Capital and Debentures) Rules, 2014:For the purposes of this rule- The expressions “Employee” means—
-
- a permanent employee of the company who has been working in India or outside India;
- a director of the company, whether a whole-time director or not; or
- an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company.
Section 54(1) provides that notwithstanding anything contained in Section 53, a company can issue sweat equity shares, of a class of shares already issued, if the following conditions are satisfied:
-
- The issue has been authorized by a special resolution passed by the company in the general meeting.
- The following are specified in the resolution: (a) the number of shares, (b) current market price; (c) consideration, if any; and (d) class or classes of directors or employees to whom such equity shares are to be issued.
- Where shares are listed on a recognized stock exchange, the company issuing sweat equity shares should comply with the regulations made in this behalf by SEBI.
- A company whose shares are not so listed should issue sweat equity shares in compliance with the rules made in this behalf by the Central Government, e., Companies (Share Capital and Debentures) Rules, 2014.
2. What is the difference between Sweat Equity Shares vs ESOP?
Following are the main points of distinction between sweat equity shares & ESOS:
| Basis of Distinction | Sweat Equity Shares | ESOS |
| Meaning | Sweat Equity Shares means 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. | Employees Stock option is the option given to the company’s whole-time directors, officers or employees, which gives such directors, officers or employees the benefit or right to purchase or subscribe at a future date the securities offered by the company at a pre-determined price. |
| Issue | Sweat Equity shares can be issued at a discounted price or free for know-how and services to the Company. | Employee Stock option can be issued with the conversion right at a pre-determined price. The issue price can be less than the intrinsic value of the shares. |
| Consideration | The consideration can be partly cash and partly IPRs/value addition or fully non-cash consideration. | The consideration has to be paid in cash. |
| Lock-in-period | Sweat equity shares have a compulsory lock-in period of 3 years. | Lock-in-period is not specified for the ESOS. |
3. What is the difference between Sweat Equity vs Issue of Capital on a Preferential Basis?
Following are the main points of distinction between sweat equity & issue of capital on preference allotments:
| Points | Sweat Equity Shares | Issue of Capital on Preferential Basis |
| Meaning | Sweat equity Shares mean equity shares by a company to its employees or directors at a discount or for consideration, other than cash for providing know-how or making available right in the nature of intellectual property rights or value additions, by whatever name called. | A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81, which is neither a rights issue nor a public issue. |
| To Whom Issued | Sweat Equity Shares are issued to employees or directors. | A preferential issue is an issue to a select group of persons. |
| How Issued | Sweat equity shares are issued at a discount or for consideration, other than cash. | A preferential issue at par or a premium. |
Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.
Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.
The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:
- The statutory material is obtained only from the authorized and reliable sources
- All the latest developments in the judicial and legislative fields are covered
- Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
- Every content published by Taxmann is complete, accurate and lucid
- All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
- The golden rules of grammar, style and consistency are thoroughly followed
- Font and size that’s easy to read and remain consistent across all imprint and digital publications are applied
Sign Up
To subscribe to our weekly newsletter please log in/register on Taxmann.com
Latest Books
Everything on Tax and Corporate Laws of India
To subscribe to our weekly newsletter please log in/register on Taxmann.com
