Employees Stock Option Scheme (ESOP) and Sweat Equity Shares are two methods of issuing shares by a company to its employees and also can increase the share capital of the Company. Both ESOP and Sweat Equity Shares are issued as per the provisions of the Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014. However, the listed companies additionally need to comply with the provisions of the Securities Exchange Board of India (SEBI) Regulations/Guidelines for the issuance of these shares.

Employees Stock Option Scheme (ESOP)

An employee stock option plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company. Companies often use ESOPs as a finance strategy to align the interests of their employees with those of their shareholders.

Employee Stock Option is defined under Section 2(37) of the Companies Act, 2013.

The employees stock option means the option provided to the directors, employees or officers of the company or its holding or subsidiary company, which gives the right or benefit to subscribe or purchase the shares of the company at a predetermined price on a future date.

Sweat Equity Shares

Section 2(88) of the Companies Act, 2013 defines Sweat Equity Shares. The sweat equity shares mean shares issued by a company to its directors or employees for non-cash consideration or at a discount for making rights available in the nature of intellectual property rights or providing know-hows or any providing any value additions in any form.

Key differences between the ESOP and Sweat Equity 

1.        Meaning As per Section 2(37) of the Companies Act, 2013 ‘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. As per Section 2(88) of the Companies Act, 2013“Sweat Equity Shares” means that such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash for providing them know how or making available rights in the nature of intellectual property rights or values addition, by whatever name called.
2.        Nature ESOPs are issued in the form of an incentive to directors and employees.

It serves as a retention plan to Directors and Employees

They do not create an obligation, and it is in the form of a right given to employees to exercise their option to purchase the shares.

Sweat equity shares are issued to the employees or directors as consideration for providing intellectual property rights or know-how or value additions to the company which play a significant role in company’s growth.
3. Can be issued to (a) a permanent employee of the company who has been working in India or outside India; or

(b) a director of the company, whether a whole-time director or not but excluding an independent director; or

(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside company but does not include

(i) an employee who is a promoter or a person belonging to the promoter group; or

(ii) a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.”

(a) Permanent employee of the Company whether working in India or outside India;

(b)Director of the Company, whether a whole-time Director or not;

(c) Employee or Director as mentioned above of a Subsidiary in India or outside India, orof a Holding Company of the Company.

4.        Issuing Norms No such norm, company can grant ESOP at any point of time after incorporation. Company can issue Sweat Equity shares only after remaining in business for 1 year.
5.        Quantum of issue Company has no such restrictions in issuance or grant of ESOPs. For one time: The Company shall not issue Sweat Equity Shares for more than 15% of existing paid-up share capital or issue value of shares Rs. 5,00,00,000/- (Rupees Five Crores), whichever is higher.

For lifetime: The Company shall not issue Sweat Equity shares for more than 25% of the paid-up Equity Capital at any time.

6.        Pricing of issue There is no pricing guideline defined for issuance or grant of ESOPs.

The company decides the exercise price.

The price of the Sweat equity shares shall be determined by the Registered valuer by providing valuation report as the fair price giving justification for such valuation.
7.        Consideration The consideration for ESOP has to be paid in cash. The consideration for sweat equity shares is other than cash or at a discount which may be partly cash and party non-cash
8.        Lock in period There is no lock-in period.

The company decides the lock-in period.

It has a compulsory lock –in period of 3 years.
9.        Registers The Company shall maintain a Register of Employees Stock Options in Form SH-6. The Company shall maintain a Register of Sweat Equity Shares in Form SH-3.
10.    Tax Implications (i) Upon allotment of Shares:

The employer will have to compute the perquisite value of ESOP taxable in the hands of the employee under “income from salary” and deduct tax on such shares.

(ii)At the time of sale:

1) Less than 12 Months: It will be considered as short-term capital gain.

2) More than 12 Months: It will be considered as long-term capital gain.

At the time of allotment: – sweat equity shares will be taxable in the hands of employee under head “Salary” in the year in which the shares are allotted or transferred to employees.

At the time of sale:- Capital gains are taxable in hands of employee in year in which shares/securities are transferred.



Priyanka Sethia Asha DiwakarThis article is authored by Mrs. Asha Diwakar (Practicing Company Secretary, Bangalore) who is Co-founder and Designated Partner of M/s CLAAT Corporate Advisors LLP (Chhota CFO) and Priyanka Sethia.

Mrs. Asha Diwakar may be contacted at [email protected]/ [email protected] and +91 973 973 6999/ +91 991 666 8146

Disclaimer: Utmost care has been taken to prepare the article. However, inadvertently if any error occurs, please note that the authors shall not be held responsible for any such cause. The content published is only for educational purpose and shall not be construed as rendering of any professional advice in any manner whatsoever. The readers must exercise their own judgement and refer the original source before any implementation. The content is an original work of the authors and may be used only after prior written permission.

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  1. vswami says:

    “The content is an original work of the authors and may be used ONLY AFTER PRIOR written permission.”

    “Tags: Companies Act, Companies Act 2013, ESOP, sweat equity’

    FONT < This and similar such write-ups oft and onpublished simply sum up the special features of the two 'employee benefit schemes' commonly and widely adopted and in vogue, the only or primary objective whereof is to keep / stall 'employee turnover' (shifting jobs) to the detriment of employers !?! For a host of such material openly available even on a diligent search of the websites e.g .Google may be found to have been dealt with the Topic from varying angles !?!

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September 2021