Thursday 1 October 2015

ESOP AND SWEAT EQUITY UNDER COMPANIES ACT 2013
(BENEFIT TOOLS FOR THE EMPLOYEES OF THE COMPANIES)
ESOPs and Sweat equity shares are the management techniques (tools) offered by the companies which act as an incentive scheme to the professionals of such companies.

·         CORE POINTS ON ESOPS AND SWEAT EQUITY-

“Sweat equity shares” means 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 their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.”
The term ‘know-how’ is not restricted to technical know-how but can extend to practical knowledge, skill and expertise. Hence, imparting practical knowledge to the company would be considered as value addition. (“Value Addition” means actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing know how or making available rights in the nature of intellectual property rights, by such person to whom sweat equity is being issued for which the consideration is not paid or included in the normal remuneration payable under the contract of employment, in the case of an employee.)

“Employee Stock Option Plan (ESOP) )“employee stock option” means the option given to the whole-time Directors, Officers or employees of a company 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 predetermined price .
The consideration for ESOP can be decided by company based upon the value of company, which may be just face value also.
It is a benefit plan for employees which make them owners of stocks in the company. This scheme is used by the companies to reward, motivate, remunerate and retain their employees.
Sweat Equity can be issued to the promoters of the Company whereas ESOS/ESOP cannot be issued to the promoters or promoter group.          
ESOP and Sweat Equity are governed by Section 62 and Section 54 respectively of the Companies Act 2013 read with the rules made thereunder.

·         Difference in the meaning of Employees for the purpose of ESOPs and Sweat Equity-
FOR ESOPs
“Employee” means
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 sub-clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding 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 by himself or through his relative or through any body corporate,     directly or indirectly holds more than 10% of the outstanding equity shares of the             
        company.

FOR SWEAT EQUITY
a)      A permanent employee of the company who has been working in India or outside India, for at least one year; or
b)      A director of the company, whether a whole time director or not; or
c)     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.