Freezing of Folios of physical shareholders... Last date for KYC is 30th September 2023... Act now Ref: SEBI Circular SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/37


Difference Between ESOP and Sweat Equity Shares

ESOP and Sweat Equity Shares

Employees may be given shares of a corporation. This motivates the staff and gives them an incentive to improve their contributions to the business. Additionally, it aids in keeping staff on board with the business for the long haul. The success of the business is largely dependent on its staff. It is possible to reward them for their work by issuing shares to them.

Employee Stock Option Plans (ESOP) and Sweat Equity Shares are two ways for businesses to give their employees stock options. The corporation can raise more funds by issuing the shares. According to the terms of the Companies Act of 2013 and the Companies (Share Capital and Debentures) Regulations of 2014, both ESOP and Sweat Equity Shares are issued. However, in order to issue these shares, listed companies must adhere to the Securities Exchange Board of India Regulations/Guidelines.


What are the  Key Differences between ESOP and Sweat Equity?

ESOP and sweat equity shares differ greatly from one another, despite the fact that the two terms are sometimes used interchangeably. Despite this, they share a fundamental similarity in that they both allow a corporation to distribute shares to its own employees.

Generally, after a public offering, a company’s shares are listed on stock markets. Nonetheless, some businesses might provide some of their stock to their own employees. This serves as an incentive for the staff and motivates them to contribute to the expansion of the business because doing so will also increase their shareholdings.

What is ESOP?

The term “ESOP” stands for “Employees Stock Option Plan.” In accordance with this plan, a firm grants the option to purchase its shares to its own directors, employees, and officers as well as the directors, employees, and officers of any subsidiaries or holding companies. These shares are distributed in return for payment in cash.

The classes of employees that are eligible for the plan are predetermined if a company intends to offer an ESOP. Also, the award date and share price are made known in advance. The price is typically drastically reduced to encourage employees to make an investment in the business they work for.

Unfortunately, ESOPs are not immediately distributed after being offered. Instead, they are kept in a trust fund until the vesting period, which is a set amount of time. Eligible employees must stay with the company throughout the vesting period in order to be eligible to receive the shares allocated to them under an ESOP. They can then exercise their ESOPs and purchase company shares at the grant price on the vesting date, which is the day the vesting term ends, if they want to do so.

What are Sweat Equity Shares?

Another type of stock that is distributed to a company’s employees is sweat equity. They serve as a vehicle for businesses to express their gratitude to specific individuals who make remarkable contributions to the development of the business. In other words, they serve as a form of compensation for the workers’ efforts and contributions to the business.

Shares of sweat equity are issued for non-cash payment or at a discount. For any of the aforementioned reasons, these shares are given to certain employees or directors:

  • Outstanding contribution to the completion of a project or assignment 
  • Demonstration of technical skill in a particular field 
  • Addition of value by the employee to the business by any outstanding contribution or through rights to intellectual property

Major Differences Between ESOP and Sweat Equity Shares

Now that you are familiar with the principles of these two types of shares granted to employees, we can compare ESOPs and sweat equity shares in a number of important areas. See the table below for the main distinctions between ESOP and sweat equity shares.

Particular Sweat equity shares and ESOPs are governed by Sections 2(37) and 2(88) of the Companies Act of 2013. Meaning ESOPs are options that provide staff members of a business the opportunity to buy the firm’s shares at a predetermined price at a later date. Sweat equity shares are shares that a firm issues to its directors or workers at a discount or for non-cash payment in exchange for their contributions of technical know-how or intellectual property. Kind of shares ESOPs are given out as a reward for keeping the best employees at the firm. Employees who have made a substantial contribution to the company’s expansion are given sweat equity as compensation. Eligible parties-

  • Any corporate permanent employee based in India or overseas
  • Any director of the firm, both permanent and temporary directors (but excluding independent directors)
  • Every regular worker or director of a holding business, an associate company, a subsidiary firm located in India or elsewhere
  • Any corporate permanent employee based in India or overseas
  • any corporate director
  • Every permanent employee or director of a holding company, a subsidiary firm abroad, or both

Time of the problem ESOPs may be issued at any time following the incorporation of the business. Only when a firm has been in operation for at least a year are sweat equity shares permitted to be issued. The size of the problem The amount of ESOP issues is not constrained. For one-time problems: Just 15% of a company’s current paid-up share capital, or Rs. 5 crores, whichever is larger, may be issued in sweat equity shares.

A firm may issue sweat equity shares equal to up to 25% of its paid-up share capital as lifetime issues. giving the situation some thought Cash must be used as the form of payment for ESOP consideration. Cash or non-cash compensation might be given in exchange for sweat equity shares. The cost of the problem The corporation itself determines the grant price or exercise price. A registered valuer sets the pricing for sweat equity shares. Lock-in time There is no set lock-in time for ESOPs. The lock-in period for sweat equity shares is three years. At the time of allocation, ESOPs are taxed in accordance with their classification as perquisites on salaries, falling under the category of “income from salaries.” In the year of allocation, sweat equity shares are taxed under the heading “income from salary.” Taxes that are due when shares are sold All sales earnings are subject to capital gains tax, if any. All sales earnings are subject to capital gains tax, if any.

Employees Stock Option Plan

According to Section 2(37) of the 2013 Companies Act, an employee stock option is a type of stock. The phrase “employee stock option” refers to an option granted to executives, directors, or employees of the firm, its holding company, or a subsidiary of the company, which entitles the holder to subscribe for or acquire shares of the company at a certain price at a future date. When a corporation seeks to raise subscribed capital, issue of sweat equity shares. The process of issuing ESOPs is governed by Rule 12 of the Companies (Share Capital and Debentures) Regulations, 2014 (the rules).

The Companies Act of 2013’s Section 2(88) defines a sweat equity share. The term “sweat equity shares” refers to shares that a firm issues to its directors or workers in exchange for contributing intellectual property rights, know-how, or any other kind of value addition in exchange for non-cash remuneration or at a discount. The issuing of sweat equity shares is governed by Rule 8 of the 2014 Corporations (Share Capital and Debentures) Regulations.


The final truth is that there are some fundamental similarities between ESOPs and sweat equity shares. They are both provided to employees and could both be on sale. Beyond this, however, there are a lot of other distinctions between sweat equity shares vs esop. Whether the firm you work for offers either ESOPs or sweat equity, being aware of these differences will help you better comprehend the type of shares you get.


Previous Post
Newer Post