A COMPREHENSIVE A COMPREHENSIVE CONTEMPLATION ON ESOP CONTEMPLATION ON ESOP

AND SWEAT EQUITYAND SWEAT EQUITY

Presented by:Presented by:

Laj C.A Laj C.A 2009-23 2009-23

EMPLOYEE STOCK OPTION EMPLOYEE STOCK OPTION SCHEMESCHEME

CONCEPTUAL BASIS OF ESOP:CONCEPTUAL BASIS OF ESOP: History:History:

The The concept was developed in the 1950s and usually credited to Louis concept was developed in the 1950s and usually credited to Louis

Kelso;Kelso;

In 1916, Sears Roebuck decided to fund its pension plan primarily with In 1916, Sears Roebuck decided to fund its pension plan primarily with

company stock. The concept was that the employees’ ownership of Sears company stock. The concept was that the employees’ ownership of Sears

stock was a good retirement benefit for them and at the same time, an stock was a good retirement benefit for them and at the same time, an

excellent way to motivate employees to improve the company’s profitabilityexcellent way to motivate employees to improve the company’s profitability

In U.S. it is estimated that 9% of all stock is held in different forms of ESOPIn U.S. it is estimated that 9% of all stock is held in different forms of ESOP

DEFINITIONSDEFINITIONS Section 2(15A): Employee Stock Option means the option given to the whole time Section 2(15A): Employee Stock Option means the option given to the whole time

directors, officers or employees of a company, which gives such directors, officers 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 or employees the benefit or right to purchase or subscribe at a future date, the

securities offered by the company at a pre determined price.securities offered by the company at a pre determined price.

The Section 81 read with various SEBI Guidelines speaks about ESOP; Securities The Section 81 read with various SEBI Guidelines speaks about ESOP; Securities

Exchange Board of India framed the SEBI (Employee Stock Option Scheme and Exchange Board of India framed the SEBI (Employee Stock Option Scheme and

Employees Stock Purchase Scheme) Guidelines, 1999 and has been amended Employees Stock Purchase Scheme) Guidelines, 1999 and has been amended

thereafter from time to time;thereafter from time to time;

OBJECTIVES OF ESOPOBJECTIVES OF ESOP Attracting critical skillsAttracting critical skills Employee feeling of ownership and commitmentEmployee feeling of ownership and commitment Creating additional wealth for employeesCreating additional wealth for employees A method to supplement social security benefitsA method to supplement social security benefits To retain employees or groups apprehended of high turnoverTo retain employees or groups apprehended of high turnover To introduce a performance management system without incurring full cash out To introduce a performance management system without incurring full cash out

flowflow As a possible hedge against hostile controlling interest As a possible hedge against hostile controlling interest To enforce corporate governanceTo enforce corporate governance

Different Types of ESOP:Different Types of ESOP: Employee Stock Option Scheme (ESOS):Employee Stock Option Scheme (ESOS):

the company grants an option to its employees to acquire shares at a the company grants an option to its employees to acquire shares at a future date future date at a at a pre-determined pricepre-determined price. Eligible employees are free to acquire shares on vesting . Eligible employees are free to acquire shares on vesting within within the exercise periodthe exercise period. Employees are free to dispose of the shares subject to lock-in-. Employees are free to dispose of the shares subject to lock-in-period if any. Generally exercise price is lower than the prevalent market price.period if any. Generally exercise price is lower than the prevalent market price.

Contd….Contd…. Employee Stock Purchase Plan (ESPP):Employee Stock Purchase Plan (ESPP):

This is generally used in This is generally used in listed companieslisted companies, wherein the employees are , wherein the employees are given the right to acquire shares of the given the right to acquire shares of the company immediatelycompany immediately, , not at a not at a future datefuture date as in ESOS, at a price as in ESOS, at a price lower than the prevailing market lower than the prevailing market priceprice. Shares issued by listed companies under ESPP will be subject to . Shares issued by listed companies under ESPP will be subject to lock-in-period, as a result, the employee cannot sell the shares and/or the lock-in-period, as a result, the employee cannot sell the shares and/or the employee has to continue with the employer for a certain number of years. employee has to continue with the employer for a certain number of years. The company offers shares to employees as part of a public issue .The company offers shares to employees as part of a public issue .

Share Appreciation Rights (SAR)/ Phantom Shares:Share Appreciation Rights (SAR)/ Phantom Shares:

Under this scheme, Under this scheme, no shares are offered or allotted to the employeeno shares are offered or allotted to the employee. . The employee is given the The employee is given the appreciation in the value of shares between appreciation in the value of shares between two specified datestwo specified dates as an incentive or performance bonus, that is linked to as an incentive or performance bonus, that is linked to the performance of the company as a whole, as reflected in its share value.the performance of the company as a whole, as reflected in its share value.

Flexibilities in Application of ESOPFlexibilities in Application of ESOP Stock Appreciation Rights: employees are given "Rights" to a particular number Stock Appreciation Rights: employees are given "Rights" to a particular number

of shares at the market price on the date of allotment of Rights. Shares are of shares at the market price on the date of allotment of Rights. Shares are

physically not transferred in the names of employees nor do they give any money physically not transferred in the names of employees nor do they give any money

to buy the shares. These rights are redeemable in instalments at regular intervals at to buy the shares. These rights are redeemable in instalments at regular intervals at

the market price prevailing on the date of the redemption. Employees are given the market price prevailing on the date of the redemption. Employees are given

the appreciation benefit.the appreciation benefit.

Options to employees to buy shares at the average of the last six months market Options to employees to buy shares at the average of the last six months market

price and offer soft loans from the company to buy these shares, These options are price and offer soft loans from the company to buy these shares, These options are

given in instalments at intervals of one or two years. Thus, there is no lock in given in instalments at intervals of one or two years. Thus, there is no lock in

periodperiod

Offer the option of warrants which are converted into shares at a fixed price at the Offer the option of warrants which are converted into shares at a fixed price at the

option of the employee. In this, the warrants are converted into shares at far less option of the employee. In this, the warrants are converted into shares at far less

price than the market and this makes the scheme attractive.price than the market and this makes the scheme attractive.

Salient FeaturSalient Featurees of ESOPs of ESOP

An option is given to employees to acquire equity shares (or other convertible An option is given to employees to acquire equity shares (or other convertible securities) in the company after a future date but the price is fixed in advance;securities) in the company after a future date but the price is fixed in advance;

The employee has the choice to decide whether to acquire the shares/convertible The employee has the choice to decide whether to acquire the shares/convertible securities or not;securities or not;

In case the employee opts for the shares, he has to exercise an option and pay the In case the employee opts for the shares, he has to exercise an option and pay the agreed price;agreed price;

After the lock-in period (if any) the employee can sell the shares in the market and After the lock-in period (if any) the employee can sell the shares in the market and realize the gain;realize the gain;

The employees holding stock options do not have the right to receive dividend or The employees holding stock options do not have the right to receive dividend or vote or enjoy any other privileges of a shareholder till the shares are actually issued vote or enjoy any other privileges of a shareholder till the shares are actually issued on exercise of option, after the completion of vesting period;on exercise of option, after the completion of vesting period;

The options granted to the employees are not transferrable to any other person. The The options granted to the employees are not transferrable to any other person. The option granted to the employee cannot be pledged, hypothecated, mortgaged or option granted to the employee cannot be pledged, hypothecated, mortgaged or otherwise alienated in any other mannerotherwise alienated in any other manner

UNDERLYING PROCEDURE AND UNDERLYING PROCEDURE AND APPLICATION OF ESOPAPPLICATION OF ESOP

EligibilityEligibility

He should be an ‘Employee’He should be an ‘Employee’

As per the definition of ‘Employee’ given in the SEBI As per the definition of ‘Employee’ given in the SEBI guidelines, guidelines, it includes directors and whole time directorsit includes directors and whole time directors

An employee who is a promoter or belongs to the promoter An employee who is a promoter or belongs to the promoter group group is not is not eligible to participate in ESOPeligible to participate in ESOP

Recently the SEBI has permitted the nominee directors Recently the SEBI has permitted the nominee directors appointed appointed by the by the financial institutions, banks, etc., on the board financial institutions, banks, etc., on the board of directors of directors of the assisted of the assisted companies to participate in ESOP companies to participate in ESOP subject to the subject to the provisions of the contract or agreement entered in to provisions of the contract or agreement entered in to

between such director and the nominating institution.between such director and the nominating institution.

Disqualification Disqualification An employee who is a promoter or belongs to An employee who is a promoter or belongs to

promoter grouppromoter group A director who either by himself or through his A director who either by himself or through his

relative or through any body corporate, directly or relative or through any body corporate, directly or indirectly holds more than 10% of the outstanding indirectly holds more than 10% of the outstanding equity shares of the company shall not be eligible to equity shares of the company shall not be eligible to participate in the ESOS.participate in the ESOS.(Promoter is a person(s)(Promoter is a person(s)

- who is in over all control of the company- who is in over all control of the company- who is instrumental in the formation of the company- who is instrumental in the formation of the company- is named so in the offer document- is named so in the offer document

Promoter group includes immediate relatives of the promoter i.e. spouse, Promoter group includes immediate relatives of the promoter i.e. spouse, parent, brother, sister or child of the person or of the spouse)parent, brother, sister or child of the person or of the spouse)

Various Stages in The ESOP ProcessVarious Stages in The ESOP ProcessGrantGrant – it means issue of stock options to employees under ESOP. The employees – it means issue of stock options to employees under ESOP. The employees may be required to pay an upfront amount at time of grant of options, depending upon may be required to pay an upfront amount at time of grant of options, depending upon the provisions of the scheme framed by the company. The said amount is adjusted the provisions of the scheme framed by the company. The said amount is adjusted when the shares are allotted on exercise of option.when the shares are allotted on exercise of option.

VestingVesting- Vesting means the process by which the employee gets the right to apply for - Vesting means the process by which the employee gets the right to apply for and be issued shares of the company under the options granted to him. Till the vesting and be issued shares of the company under the options granted to him. Till the vesting takes place, the employee does not have right to apply for the company’s shares. Upon takes place, the employee does not have right to apply for the company’s shares. Upon vesting, the employee gets an unfettered right to apply for the issue of shares.vesting, the employee gets an unfettered right to apply for the issue of shares.

Vesting PeriodVesting Period- it means the period during which the vesting of the options granted to - it means the period during which the vesting of the options granted to an employee takes place. The SEBI guidelines provide that the vesting period shall not an employee takes place. The SEBI guidelines provide that the vesting period shall not be less than one year from the date of grant of options. be less than one year from the date of grant of options.

Vesting percentageVesting percentage- it refers to that portion of the total options granted, which an - it refers to that portion of the total options granted, which an employee is eligible to exercise. In other words, vesting of the entire lot of options employee is eligible to exercise. In other words, vesting of the entire lot of options granted can take place either in one stokes at the completion of a fixed period or it can granted can take place either in one stokes at the completion of a fixed period or it can be staggered or phased vesting. be staggered or phased vesting.

Exercise periodExercise period- it means the time period after vesting within which the employee - it means the time period after vesting within which the employee should exercise his right to apply for the shares, otherwise the vested options would should exercise his right to apply for the shares, otherwise the vested options would lapse. This period starts from the date of vesting of options.lapse. This period starts from the date of vesting of options.

ExerciseExercise- it means making of an application to the company by an employee together - it means making of an application to the company by an employee together with the requisite amount, for issue of shares against the options already vestedwith the requisite amount, for issue of shares against the options already vested

ESOP AND UNLISTED COMPANIESESOP AND UNLISTED COMPANIES Issues Related To Unlisted Company’s ESOP SchemeIssues Related To Unlisted Company’s ESOP Scheme

The main issue regarding the ESOP scheme in an unlisted The main issue regarding the ESOP scheme in an unlisted company is that how does the employee make money on his company is that how does the employee make money on his shares?shares?

For this some sort of a liquidity event is needed. Liquidity events For this some sort of a liquidity event is needed. Liquidity events could include:could include:

Initial Public OfferInitial Public Offer AcquisitionAcquisition Equity investmentEquity investment Buyback by the companyBuyback by the company Buyback by the Employee Welfare trustBuyback by the Employee Welfare trust Purchase by the promoters/foundersPurchase by the promoters/founders

till shares are issued to him on exercise of the optiontill shares are issued to him on exercise of the option SEBI Reform committee recommended that ESOP shares issued by SEBI Reform committee recommended that ESOP shares issued by

an unlisted company may be allowed to get listed after the IPO an unlisted company may be allowed to get listed after the IPO subject to fulfilment of the following requirements:subject to fulfilment of the following requirements: Ratification of the resolution passed for issuance of ESOPRatification of the resolution passed for issuance of ESOP Disclosures in the offer documentDisclosures in the offer document

ESOP and Listed CompaniesESOP and Listed Companies The procedure for formulating an ESOP scheme in a listed company The procedure for formulating an ESOP scheme in a listed company

should be in accordance with the guidelines of SEBIshould be in accordance with the guidelines of SEBI SEBI (Employee Stock Option Scheme And Employee Stock Purchase SEBI (Employee Stock Option Scheme And Employee Stock Purchase

Scheme) Guidelines, 1999 regulates the ESOP in Listed Companies.Scheme) Guidelines, 1999 regulates the ESOP in Listed Companies. Compensation CommitteeCompensation Committee

No ESOP can be offered by a listed company unless a No ESOP can be offered by a listed company unless a Compensation Committee is constitutedCompensation Committee is constituted

Committee consist of majority of independent directors Committee consist of majority of independent directors DutiesDuties: : administer and supervise the schemeadminister and supervise the scheme formulate the detailed terms and conditions of the schemeformulate the detailed terms and conditions of the scheme frame policies and system to ensure that there is no violation of frame policies and system to ensure that there is no violation of

SEBI (Insider Trading) Regulations,1992 and SEBI (Prohibition SEBI (Insider Trading) Regulations,1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulation, 1995of Fraudulent and Unfair Trade Practices) Regulation, 1995

Shareholder’s ApprovalShareholder’s Approval By way of Special Resolution in a general meetingBy way of Special Resolution in a general meeting A separate resolution in general meeting is required in case of grant of optionA separate resolution in general meeting is required in case of grant of option

to a subsidiary or a holding companyto a subsidiary or a holding company to an to an identified employees, during any one year,

equals to or exceed 1% of the issued capital of the company at the time of grant equals to or exceed 1% of the issued capital of the company at the time of grant of option.of option.

• The next steps are:The next steps are:• Exercise of OptionExercise of Option• Allotment of Shares Allotment of Shares • Sale of SharesSale of Shares• Listing of ESOPListing of ESOP

• Shares arising out of ESOP shall be listed immediately upon exercise of option, Shares arising out of ESOP shall be listed immediately upon exercise of option, in a recognized stock exchange where the securities of the company are listed.in a recognized stock exchange where the securities of the company are listed.

ESOP Procedural – Flowchart

Drafting of ESOP Scheme

Consideration of ESOP Scheme by Board & proposing

constitution of ‘Compensation Committee’ (CC)

Consideration of ESOP Schemein EGM & authorisation for

Constitution of CC.

Meeting of CC - determinationof eligibility criteria, exercise price,

vesting Period, exercise period etc.

Communicate – Grant of options to Employees

Acceptance of Grant

Communicate – Vesting period

Employees exercising options – fwdng application to CC

Hold BM for allotment of Shares

intimating allotment to Concerned Employee

Entry into Register of Members

Reporting to:ROC

RBI, if applicable

Convey allotment to CC

ADVANTAGES, DISADVANTAGES & LIMITATION OF ESOPADVANTAGES, DISADVANTAGES & LIMITATION OF ESOP AdvantagesAdvantages

Awareness of company successAwareness of company success Employee commitment and satisfactionEmployee commitment and satisfaction Spurs changeSpurs change Heightened decision makingHeightened decision making Encourages reengineeringEncourages reengineering

DisadvantagesDisadvantages Stock markets are highly volatileStock markets are highly volatile ESOP can increase the financial risk of employees in case they over-invest in ESOP can increase the financial risk of employees in case they over-invest in

their companytheir company The difference between the ‘fair value’ and the discounted ‘exercise price’ has The difference between the ‘fair value’ and the discounted ‘exercise price’ has

to be treated as employee compensation and as such the same has to be debited to be treated as employee compensation and as such the same has to be debited to the profit and loss account of the companyto the profit and loss account of the company

In case the ESOP scheme has a lock-in-period after allotment of shares, then it In case the ESOP scheme has a lock-in-period after allotment of shares, then it leads to blocking of funds.leads to blocking of funds.

ESOP leads to dilution in the shareholding percentage of other shareholders ESOP leads to dilution in the shareholding percentage of other shareholders including the promoter group.including the promoter group.

CRITICAL ANALYSIS OF ESOP – CHALLENGES FACED & CRITICAL ANALYSIS OF ESOP – CHALLENGES FACED & POSSIBLE SOLUTIONSPOSSIBLE SOLUTIONS

•The Challenges AboundThe Challenges Abound• ESOP as Employee’s RightESOP as Employee’s Right• Associated Cement Staff Union, Mumbai v. State of Maharashtra & OrsAssociated Cement Staff Union, Mumbai v. State of Maharashtra & Ors• A study by the International association for Financial Planning found that 66 A study by the International association for Financial Planning found that 66

percent of financial planners stated that employees do not understand the risks percent of financial planners stated that employees do not understand the risks of stock based compensation plans. The four challenges areof stock based compensation plans. The four challenges are• TechnicalTechnical• PsychologicalPsychological• IdeologicalIdeological• Structural Structural

Clearing The PitfallsClearing The Pitfalls

ESOP in a Bearish MarketESOP in a Bearish Market

Some SolutionsSome Solutions

SWEAT EQUITY SHARESSWEAT EQUITY SHARES PROVISIONS IN COMPANIES ACT ON SWEAT EQUITYPROVISIONS IN COMPANIES ACT ON SWEAT EQUITY

Section 79A of the Companies Act, 1956 authorizes the issue of sweat equity shares subject to Section 79A of the Companies Act, 1956 authorizes the issue of sweat equity shares subject to certain conditions.certain conditions.

Section 79A:Section 79A: (1)(1) Notwithstanding anything contained in section 79, a company may issue sweat equity Notwithstanding anything contained in section 79, a company may issue sweat equity

shares of a class of shares already issued if the following conditions are fulfilled, shares of a class of shares already issued if the following conditions are fulfilled, namely-namely- (a) the issue of sweat equity shares is authorized by a special resolution passed by the company (a) the issue of sweat equity shares is authorized by a special resolution passed by the company

in the general meeting;in the general meeting; (b)the resolution specifies the number of shares, current market price, consideration, if any, and (b)the resolution specifies the number of shares, current market price, consideration, if any, and

the class or classes of directors or employees to whom such equity shares are to be issued;the class or classes of directors or employees to whom such equity shares are to be issued; (c)not less than one year has, at the date of the issue, elapsed since the date on which the (c)not less than one year has, at the date of the issue, elapsed since the date on which the

company was entitled to commence business;company was entitled to commence business; (d)the sweat equity shares of a company, whose equity shares are listed on a recognized stock (d)the sweat equity shares of a company, whose equity shares are listed on a recognized stock

exchange, are issued in accordance with the regulations made by the SEBI in this behalf:exchange, are issued in accordance with the regulations made by the SEBI in this behalf: Provided that in the case of a company whose equity shares are not listed on any recognized stock Provided that in the case of a company whose equity shares are not listed on any recognized stock

exchange, the sweat equity shares are issued in accordance with the guidelines as may be prescribed.exchange, the sweat equity shares are issued in accordance with the guidelines as may be prescribed. (2) All the limitations, restrictions and provisions relating to equity shares shall be applicable to such (2) All the limitations, restrictions and provisions relating to equity shares shall be applicable to such

sweat equity shares issued under sub-section (1).sweat equity shares issued under sub-section (1).

TO WHOM SWEAT EQUITY COULD BE ISSUEDTO WHOM SWEAT EQUITY COULD BE ISSUED Sweat equity shares by definition could be issued only to the Sweat equity shares by definition could be issued only to the ‘employees or ‘employees or

directors’directors’ of the company incorporated under the Companies Act, 1956. it could of the company incorporated under the Companies Act, 1956. it could also be issued to the directors or employees of the also be issued to the directors or employees of the foreign subsidiary of an Indian foreign subsidiary of an Indian incorporated company incorporated company a foreign subsidiary is incorporated outside India and can a foreign subsidiary is incorporated outside India and can at best be covered by the definition of ‘body corporate’ and not a ‘company’ under at best be covered by the definition of ‘body corporate’ and not a ‘company’ under the Companies Act, 1956, the section has made a fiction of including such a body the Companies Act, 1956, the section has made a fiction of including such a body corporate as a company for the purposes of issue of sweat equity shares. While the corporate as a company for the purposes of issue of sweat equity shares. While the section mentions only ‘employees or directors’ the SEBI regulations also mentions section mentions only ‘employees or directors’ the SEBI regulations also mentions issue of sweat equity to issue of sweat equity to ‘promoters’‘promoters’. .

The Consideration for Issue of Sweat EquityThe Consideration for Issue of Sweat Equity The allotment of sweat equity should be The allotment of sweat equity should be ‘at a discount’‘at a discount’ or or ‘consideration ‘consideration

otherwise than cash’otherwise than cash’. Sweat equity could be issued in consideration of . Sweat equity could be issued in consideration of providing know-how or making available rights in the nature of intellectual providing know-how or making available rights in the nature of intellectual property or for value addition contributed by such employee or director. property or for value addition contributed by such employee or director.

THE PRICE AT WHICH THE SWEAT EQUITY THE PRICE AT WHICH THE SWEAT EQUITY COULD BE OFFEREDCOULD BE OFFERED

The SEBI regulations state that the price shall not be less than the higher of the The SEBI regulations state that the price shall not be less than the higher of the following-following- The average of the weekly high and low of the closing prices of the related The average of the weekly high and low of the closing prices of the related

equity shares during last six months preceding the relevant date; orequity shares during last six months preceding the relevant date; or The average of the weekly high and low f the closing prices of the related The average of the weekly high and low f the closing prices of the related

equity shares during the two weeks preceding the relevant date.equity shares during the two weeks preceding the relevant date.

The regulations for unlisted companies provide that the price should be The regulations for unlisted companies provide that the price should be “fair “fair price calculated by an independent valuer”price calculated by an independent valuer” and separate consideration is and separate consideration is given for issue of sweat equity in case of ‘consideration other than cash’given for issue of sweat equity in case of ‘consideration other than cash’

CLASS OF SHARES WHICH COULD BE ISSUED AS SWEAT EQUITYCLASS OF SHARES WHICH COULD BE ISSUED AS SWEAT EQUITY Sweat equity shares can issued only of a Sweat equity shares can issued only of a class of shares already issuedclass of shares already issued it must be only an it must be only an ‘equity’‘equity’ shares and not a ‘preference share’. shares and not a ‘preference share’.

ISSUING OF SWEAT EQUITY SHARESISSUING OF SWEAT EQUITY SHARES GENERAL PRINCIPLES IN ISSUE OF SWEAT EQUITYGENERAL PRINCIPLES IN ISSUE OF SWEAT EQUITY

The issue shall be authorized by a The issue shall be authorized by a special resolution.special resolution. The issue of sweat equity shares by a listed company shall be in The issue of sweat equity shares by a listed company shall be in

accordance with the accordance with the SEBI (Issue of Sweat Equity shares) Regulations, SEBI (Issue of Sweat Equity shares) Regulations, 20022002..

In case of an unlisted company, issue of sweat equity shares shall be In case of an unlisted company, issue of sweat equity shares shall be subject to subject to Unlisted Companies (Issue of Sweat Equity shares) Rules, Unlisted Companies (Issue of Sweat Equity shares) Rules, 20032003..

Sweat equity shares is Sweat equity shares is treated as any ordinary equity sharestreated as any ordinary equity shares issued by issued by the company in all respects except in certain cases the issue is for the company in all respects except in certain cases the issue is for consideration other than cash. The voting rights and rights as to dividend consideration other than cash. The voting rights and rights as to dividend etc. will be pari pasu with the existing class of equity shares.etc. will be pari pasu with the existing class of equity shares.

In terms f section 77A (5) (d) it is possible for the In terms f section 77A (5) (d) it is possible for the company to buy backcompany to buy back sweat equity issued to employees of the company pursuant, inter alia, to sweat equity issued to employees of the company pursuant, inter alia, to a scheme of sweat equity. a scheme of sweat equity.

SWEATY EQUITY SHARES AND UNLISTED SWEATY EQUITY SHARES AND UNLISTED COMPANIESCOMPANIES

Under The Proviso To Clause (D) To Sub-section (1) Of Section 79A, It Is Under The Proviso To Clause (D) To Sub-section (1) Of Section 79A, It Is Provided That In The Case Of A Company Whose Equity Shares Are Not Provided That In The Case Of A Company Whose Equity Shares Are Not Listed On Any Recognized Stock Exchange, The Sweat Equity Shares Should Listed On Any Recognized Stock Exchange, The Sweat Equity Shares Should Be Issued In Accordance With The Guidelines As May Be Prescribed.Be Issued In Accordance With The Guidelines As May Be Prescribed.

Unlisted Companies (Issue Of Sweat Equity Shares) Rules, 2003 Have Been Unlisted Companies (Issue Of Sweat Equity Shares) Rules, 2003 Have Been IntroducedIntroduced

To Whom Sweat Equity Could Be IssuedTo Whom Sweat Equity Could Be Issued Price At Which Sweat Equity Could Be IssuedPrice At Which Sweat Equity Could Be Issued Authorisation By Special ResolutionAuthorisation By Special Resolution Restriction on Issue of Sweat Equity SharesRestriction on Issue of Sweat Equity Shares

for more than 15% of total paid up equity share capital in a year orfor more than 15% of total paid up equity share capital in a year or shares of the value of 5 crores of rupees,shares of the value of 5 crores of rupees,

Register of SharesRegister of Shares Lock-in of Sweat Equity SharesLock-in of Sweat Equity Shares Certificate from AuditorsCertificate from Auditors

SWEAT EQUITY SHARES AND LISTED COMPANYSWEAT EQUITY SHARES AND LISTED COMPANY 79A (1)(d), sweat equity shares in cases of companies listed on a recognized stock 79A (1)(d), sweat equity shares in cases of companies listed on a recognized stock

exchange must be in accordance with the regulations made by the SEBI.exchange must be in accordance with the regulations made by the SEBI. SEBI has issued the SEBI (Issue of Sweat Equity Shares) Regulations, 2002, laying SEBI has issued the SEBI (Issue of Sweat Equity Shares) Regulations, 2002, laying

down the guidelines for the issue of sweat equity shares by listed companies.down the guidelines for the issue of sweat equity shares by listed companies. ApplicabilityApplicability To Whom Sweat Equity Could Be IssuedTo Whom Sweat Equity Could Be Issued Pricing of Sweat Equity SharesPricing of Sweat Equity Shares Valuation of Intellectual PropertyValuation of Intellectual Property Authorisation By Special ResolutionAuthorisation By Special Resolution Promoters & Sweat Equity SharesPromoters & Sweat Equity Shares

It is not clear whether sweat equity could be issued to ‘promoters’ as defined in these It is not clear whether sweat equity could be issued to ‘promoters’ as defined in these Regulations, unless such promoter is also either an employee or a director. Promoters Regulations, unless such promoter is also either an employee or a director. Promoters could also be shareholders.could also be shareholders.

in case of issue of sweat equity to promoters both the requirement of special resolution in case of issue of sweat equity to promoters both the requirement of special resolution (at which the promoter also could vote) as also an ordinary resolution (wherein the (at which the promoter also could vote) as also an ordinary resolution (wherein the promoter do not participate) shall be passed. In addition the resolution could be passed promoter do not participate) shall be passed. In addition the resolution could be passed by postal ballotby postal ballot..

ISSUE OF SWEAT EQUITY SHARES TO PROMOTERS- SOME ISSUESISSUE OF SWEAT EQUITY SHARES TO PROMOTERS- SOME ISSUES

ADVANTAGES AND DISADVANTAGES OF ADVANTAGES AND DISADVANTAGES OF SWEAT EQUITYSWEAT EQUITY

•Advantages of Sweat Equity SharesAdvantages of Sweat Equity Shares Highly efficacious in extracting the employees efficiencyHighly efficacious in extracting the employees efficiency Promotional in nature as it a means of receiving shares without spending moneyPromotional in nature as it a means of receiving shares without spending money Cost efficient for company as it can save on the employee’s to be given salaryCost efficient for company as it can save on the employee’s to be given salary Receiving of sweat equity is a long term investmentReceiving of sweat equity is a long term investment More income to the employeesMore income to the employees Receiving the right to participate in the company’s management for employeesReceiving the right to participate in the company’s management for employees

Disadvantages of Sweat Equity SharesDisadvantages of Sweat Equity Shares More of dilution of power as share is being issuedMore of dilution of power as share is being issued Can lead to inefficiency of employees when the feeling of being in power creeps inCan lead to inefficiency of employees when the feeling of being in power creeps in Can also lead to irregularity in income for the employeesCan also lead to irregularity in income for the employees Consideration in the nature of share can be heavy on otherwise low income employeesConsideration in the nature of share can be heavy on otherwise low income employees During recession or liquidation, the sweat equity share holders may face larger troubles During recession or liquidation, the sweat equity share holders may face larger troubles

as their effort go non-benefitted to them.as their effort go non-benefitted to them. Excessive issue of sweat equity shares can also lead to overcapitalisation which in turn Excessive issue of sweat equity shares can also lead to overcapitalisation which in turn

would be heavy for the companywould be heavy for the company

A COMPARATIVE STUDY OF ESOP AND SWEAT A COMPARATIVE STUDY OF ESOP AND SWEAT EQUITYEQUITY

ESOPSTypes of ESOPS:

•Direct allotment of shares•Option to acquire the shares•Stock Appreciation Rights

Issued when the company is well established

It is issued as a motivation tactic.

Can be issued only to directors & employees of the company

Sweat EquityNo options available for Sweat Equity

holders

Issued at the outset of a newly formed company or when the company is starting a new line of business

It is issued to attract the best & most sought after people in the industry

Can be issued to promoters, directors & employees

ConclusionConclusion Satyam ScamSatyam Scam

employees were holding 1.59 crore employee stock employees were holding 1.59 crore employee stock options (ESOPs). Each option can be exercised to obtain options (ESOPs). Each option can be exercised to obtain one share. The stock of the company lost more than one share. The stock of the company lost more than three-fourth of its value in a single trading session.three-fourth of its value in a single trading session.

Sweat equitySweat equity There is a long debate going on in relation of the There is a long debate going on in relation of the

issuance of sweat equity by the listed and unlisted issuance of sweat equity by the listed and unlisted companies, at present the issuance by type of companies, at present the issuance by type of companies are governed by different regulations, but it companies are governed by different regulations, but it has been advised that to bring the uniformity in the has been advised that to bring the uniformity in the law and to make it simpler for the companies, both of law and to make it simpler for the companies, both of them should be governed by similar laws.them should be governed by similar laws.

Thank YouThank You