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–
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
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.
· CONDITIONS TO BE FULFILLED FOR GRANTING AN OPTION UNDER ESOPs:
1. It should be authorized by Special Resolution.
2. Separate resolution shall be passed by shareholders in case of:-
(i) Grant of option to employee of subsidiary or holding company; or
(ii) Grant of option to identified employees, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option).
3. Company shall specify lock in period for the shares issued under ESOP pursuant to exercise of option. There shall be minimum period of one year between the grant of option and vesting of option.
4. ESOP can be issued directly by company or through Trust route.
Other Conditions for Employees under ESOP:
a) Employees cannot receive dividend or vote or enjoy any other benefit in respect of option granted to them, till shares are issued on exercise of option
b) The amount, if any, payable by the employees, at the time of grant of option-
(i) may be forfeited by the company if the option is not exercised by the employees within the exercise period; or
(ii) the amount may be refunded to the employees if the options are not vested due to non-fulfillment of conditions relating to vesting of option as per the Employees Stock Option Scheme.
c) The option granted to employees are not transferable
d) The option granted to employees cannot be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner
e) In the event of death of employee while in employment, all the options granted to him till such date shall vest in the legal heirs or nominee of the deceased employee
f) In case employee suffers a permanent incapacity while in employment all options granted to him as on date of permanent incapacitation shall vest in him on that day
g) In the event of resignation or termination of employment all options not vested in the employee as on date shall expire.
· PROCEDURE FOR ISSUE OF SHARES UNDER ESOP :
1. Convene a Board meeting to decide the terms of issue and fix the time, date and place for convening general meeting to pass special resolution and approve notice of EGM for approval of ESOP scheme.
2. Convene general meeting and pass special resolution for issue of options under employee stock option scheme (The Explanatory statement annexed to the notice of EGM shall contain additional disclosure as provided in rule 12(2) of the Companies (Share Capital and Debentures) Rules, 2014
3. File MGT-14 within 30 days of General Meeting for passing Special Resolution.
4. Hold Board meeting and make allotment of options as per employee stock option scheme
5. File return of allotment with ROC in form PAS-3 within 30 days of Board Meeting for allotment of shares against options issued.
6. Issue Share Certificates
7. Make entry in Register of Employee Stock Option in Form No. SH.6
8. Make disclosure in Boards’ Report of the year in which sweat equity issue is made (as provided in rule 12(9) of the Companies (Share Capital and Debentures) Rules, 2014
· CONDITIONS TO BE FULFILLED FOR ISSUE OF SWEAT EQUITY SHARES–
1. At the date of issue of Sweaty Equity, at least one year has been elapsed since the date on which the company has commenced business.
2. The issue should be authorized by a Special resolution in a general meeting. (Not more than 12 months from the dating of passing the special resolution should have elapsed for issuing the sweat equity)
3. The resolution should specify- the number of shares, current market value, consideration if any, the class of directors to whom shares are issued, the class of employees to whom the shares are to be issued.
4. The issue conforms to the rules prescribed.
5. If it is listed, it has to comply with the SEBI rules.
6. At the date of issue of Sweaty Equity, at least one year has been elapsed since the date on which the company has commenced business
7. The sweat equity shares shall be subject to a lock in period of 3 years from the date of allotment.
8. The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as thefair price giving justification for such valuation.
· PROCEDURE FOR ISSUE OF SWEAT EQUITY SHARES :
1. Convene a Board Meeting for consideration of issue of sweat equity shares to defined employees in consideration for providing Know-how or making available rights in the nature of intellectual property rights or value additions
2. Obtain Valuation report from a registered valuer.
3. Convene a Board meeting to decide the terms of issue and fix the time, date and place for convening general meeting to pass special resolution and approve notice of EGM
4. File form MGT 14 within 30 days of Board Meeting for issue of securities.
5. Dispatch notice of EGM with copy of both the valuation report
6. Convene general meeting and pass special resolution for issue of sweat equity shares (The Explanatory statement annexed to the notice of EGM shall contain additional disclosure as provided in rule 8(2) of the Companies (Share Capital and Debentures) Rules, 2014
7. File MGT-14 within 30 days of General Meeting for passing Special Resolution.
8. Hold Board meeting within 12 months and make allotment of sweat equity shares to defined persons.
9. File return of allotment with ROC in form PAS-3 within 30 days of Board Meeting
10. Issue Share Certificates and the fact that share certificate are lock in and the period of expiry of lock shall be stated boldly on the face of the share certificates
11. Make entry in Register of Sweat Equity Shares in Form No. SH.3
12. Make disclosure in Boards’ Report of the year in which sweat equity issue is made (as provided in rule 8(13) of the Companies (Share Capital and Debentures) Rules, 2014
· Accounting Treatment as define in Rule 8 (9) and (11) of the Companies (Share Capital and Debentures) Rules, 2014
1) Where sweat equity shares are issued for a non-cash consideration on the basis of a valuation report in respect thereof obtained from the registered valuer, such non-cash consideration shall be treated in the following manner in the books of account of the company:
(a) where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the accounting standards; or
(b) where clause (a) is not applicable, it shall be expensed off as provided in the accounting standards.
2) In respect of sweat equity shares issued during an accounting period, the accounting value of sweat equity shares shall be treated as a form of compensation to the employee or the director in the financial statements of the company, if sweat equity shares are not issued pursuant to acquisition of an asset.