Difference Between ESOP and Sweat Equity Shares with Chart

Difference Between ESOP and Sweat Equity Shares. Sources of capital broadly include equity capital and preference capital. There are various ways to raise capital which include preferential allotment, employee stock option, issue of rights shares, issue of shares with differential voting rights. It involves various approvals, disclosures, filings, maintenance of records etc which are prescribed under Chapter IV of the Companies Act 2013. Now check Key Difference between Sweat Equity Shares & ESOP from below…

Difference Between ESOP and Sweat Equity Shares

ESOP Definition

The term ‘Employee Stock Option’ (ESOP) has been defined under Sub-section (37) of Section 2 of the Companies Act, 2013, according to which “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 discussed earlier, Section 62(1)(b) provides that a company may issue further shares to its employees under a scheme of employees’ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed. In case of private company special resolution has been substituted by ordinary resolution. Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 with regard to issue of Employee stock options covers issue of ESOPs.

Meaning of 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. Sweat equity shares are governed by the Companies Act, 2013 and are subjected to a number of conditions like –

  • The issue of sweat equity shares is done by passing a special resolution (form of agreement passed by of majority of not less than two-thirds of the votes cast by the shareholders).
  • Following the issue of shares, they will be non-transferrable for a time of 3 year period.
  • The price at which the sweat equity shares and the valuation of intellectual property rights or of know-how or value additions for which sweat equity shares are to be issued will be valued by a registered valuing.

Difference Between ESOP and Sweat Equity Shares

ESOPSWEAT EQUITY SHARES
ESOPs are given in the nature of Incentive and retention plan these can be issued to employees and officers. ESOPs cannot be issued to Promoter or person belonging to the promoter group.Sweat Equity Shares are issued as consideration for creation or transfer of IPRs to the company or as other value addition these can be issued to employees, Officers and Directors of the Company.
These options can be issued with conversion right at a pre-determined price. The issue price can be less than the intrinsic value of the shares.These shares can be issued at discounted price or free for know-how and services to the company.
The consideration has to be paid in cash.The consideration can be partly cash and partly IPRs/value addition or fully noncash consideration.
These are generally issued based on a scheme to be formulated by the company stipulating the eligibility criteria such as number of years of services, employee grade etc.These are mainly intended to be issued to build up equity for directors or promoters with technical capability but with meager financial resources.
Lock-In period is not specified for the ESOP.These Shares have compulsory Lock-In Period of 3 years.
No Pricing guidelines are defined.Pricing Guidelines are defined for Sweat Equity Shares.
There is no separate register required to be maintained.A separate register of Sweat Equity Share issued has to be maintained.
Sweat Equity shares cannot be issued by Unlisted Public Company more than 15% without the approval of Central Government.There is no such restriction on ESOP.

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