Sweat Equity

According to Sweat Equity Shares under Companies Act, 2013 it means that 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 them know how or making available rights in the
nature of intellectual property rights or values addition 

According to Sweat Equity Shares under Companies Act, 2013 it means that 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 them know how or making available rights in the nature of intellectual
property rights or values addition, by whatever name called.

There are companies who issue sweat equity as an incentive or a bonus to their employees to
keep up the hard work as well as add to the business value of the company. This gives an
entrepreneurial vibe to the employee as they get rewarded multiple times once the company
scales higher and the valuation of it increases.  

From the Employer’s point of view, providing sweat equity is not only an effective but it is also
an effort made by the employer to keep the employee faithful to the company as the sweat equity
shares allotted as sweat equity gets locked in for a period of three years from the allotment.
Although Sweat Equity is taxable as perquisites in the hand of employees under Income Tax Act,
1961. When it comes to an unlisted company valuation of shares will depend on the closing and
opening market price on the date and in case of an unlisted company, that value of the share is by
SEBI Registered (Cat-I) Merchant Banker.

As mentioned before a company is allowed to issue sweat equity only up to 15% of the existing
paid up equity share capital in a year or shares of issue value of Rs. 5 crores whichever is higher.
It should not exceed 25% of the paid-up equity capital of the company at any point in time.
There is an exception provided to the start-up company at any time where the sweat equity issued
shall not exceed 50% of their paid-up capital up to 5 years from the date of its incorporation.
DEFINITION OF 'ESOP'

Definition: An employee stock ownership plan (ESOP) is a type of employee benefit plan which
is intended to encourage employees to acquire stocks or ownership in the company.

Description: Under these plans, the employer gives certain stocks of the company to the
employee for negligible or less costs which remain in the ESOP trust fund, until the options vests
and the employee exercises them or the employee leaves/retires from the company or institution.

These plans are aimed at improving the performance of the company and increasing the value of
the shares by involving stock holders, who are also the employees, in the working of the
company. The ESOPs help in minimizing problems related to incentives
An employee stock ownership plan is a qualified defined-contribution employee benefit plan
designed to invest primarily in the sponsoring employer's stock. ESOPs are qualified in the sense
that the ESOP's sponsoring company, the selling shareholder and participants receive various tax
benefits. Companies often use ESOPs as a corporate-finance strategy and to align the interests of
their employees with those of their shareholders.

Since ESOP shares are part of employees' remuneration for work provided for the company,
companies can use ESOPs to keep plan participants focused on corporate performance and share
price appreciation. By giving plan participants an interest in seeing the company's stock
performing well, these plans encourage participants to do what's best for shareholders, since the
participants themselves are shareholders. Companies provide employees with such ownership
often with no upfront costs. The company may hold the provided shares in a trust for safety and
growth until the employee retires or resigns from the company. Companies typically tie
distributions from the plan to vesting  — the proportion of shares earned for each year of service
— and when an employee leaves the company, 

ESOP (Employee stock ownership plan) refers to an employee benefit plan which offers
employees an ownership interest in the organization. Employee stock ownership plans are issued
as direct stock, profit-sharing plans or bonuses, and the employer has the sole discretion in
deciding who could avail of these options.
However, Employee stock ownership plans are just options that could be purchased at a specified
price before the exercise date. There are defined rules and regulations laid out in the Companies
Rules which employers need to follow for granting of Employee stock ownership plans to their
employees.

How ESOPs work?

An organization grants ESOPs to its employees for buying a specified number of shares of the
company at a defined price after the option period (a certain number of years). Before an
employee could exercise his option, he needs to go through the pre-defined vesting period which
implies that the employee has to work for the organization until a part or the entire stock options
could be exercised.

Why Company offers ESOPs to their employees?

Organizations often use Employee stock ownership plans as a tool for attracting and retaining
high-quality employees. Organizations usually distribute the stocks in a phased manner. For
instance, a company might grant its employees the stocks at the close of the financial year,
thereby offering its employees an incentive for remaining with the organization for receiving that
grant.

Companies offering ESOPs have long-term objectives. Not only companies wish to retain
employees for a long-term, but also intend making them the stakeholders of their company. Most
of the IT companies have alarming attrition rates, and ESOPs could help them bring down such
heavy attrition Start-ups offer stocks for attracting talent. Often such organizations are cash-
strapped and are unable to offer handsome salaries. But by offering a stake in their organization,
they make their compensation package competitive.

ESOPs from an employee’s perspective

With ESOPs, an employee gets the benefit of acquiring the shares of the company at the nominal
rate, and sell them (after a defined tenure set by his employer) and make a profit. There are
several success stories of an employee raking in the riches together with founders of the
companies. A very notable example is of Google when it went public. Its founders Sergey Brin
and Larry Page became the richest persons in the world, even the stock-holder employees earned
millions too

Benefits of ESOPs for the employers

Stock options are provided by an organization as a motivation to its employees. As the

employees would benefit when the company’s share prices soar, it would be an incentive for the
employee put in his 100 percent. Although motivation, employee retention and awarding hard
work are the key benefits which ESOP brings to the employers, there are several other
noteworthy advantages too.

With the help of ESOP options, organizations could avoid the cash compensations as a reward,
thus saving on immediate cash outflow. For organizations which are starting their business
operations on a bigger scale or expanding their business, awarding their employees with ESOPs
would work out to be the most feasible option than the cash rewards.

After becoming fully vested the company "purchases" the vested shares from the retiring or
resigning employee. The money from the purchase goes to the employee in a lump sum or equal
periodic payments, depending on the plan. Once the company purchases the shares and pays the
employee, the company redistributes or voids the stocks. Employees who resign or retire cannot
take the shares of stock with them, only the cash payment. Fired employees often only qualify
for the amount they have vested in the plan.

Employee-owned corporations are companies with majority holdings by their own employees.
These organizers are like cooperatives, except that the company does not distribute its
capital equally. Many of these companies only provide voting rights to particular shareholders.
Companies may also give senior employees the benefit of more shares compared to new
employees.
RIGHT ISSUE OF SHARES

Cash-strapped companies can turn to rights issues to raise money when they
really need it. In these rights offerings, companies grant shareholders the right
but not the obligation to buy new shares at a discount to the current trading price.
In this article, we'll explore how rights issues work and what they mean for the
company and its shareholders.

Defining a Rights Issue 

A rights issue is an invitation to existing shareholders to purchase additional
new shares in the company. More specifically, this type of issue gives existing
shareholders securities called "rights," which, well, give the shareholders the
right to purchase new shares at a discount to the market price on a stated future
date. The company is giving shareholders a chance to increase their exposure to
the stock at a discount price. (For more, watch the Stock Rights Issue video.)

But until the date at which the new shares can be purchased, shareholders may
trade the rights on the market the same way that they would trade ordinary
shares. The rights issued to a shareholder have value, thus compensating
current shareholders for the future dilution of their existing shares' value. Dilution
occurs because a rights offering spreads a company’s net profit over a wider
number of shares. Thus, the company’s earnings per share, or EPS, decreases
as the allocated earnings result in share dilution.

Why Would A Company Issue A Rights Offering?

Companies most commonly issue a rights offering to raise additional capital. A
company may need extra capital to meet its current financial
obligations. Troubled companies typically use rights issues to pay down debt,
especially when they are unable to borrow more money.

However, not all companies that pursue rights offerings are in financial trouble.
Even companies with clean balance sheets may use rights issues to raise extra
capital to fund expenditures designed to expand the company's business, such
as acquisitions or opening new facilities for manufacturing or sales. If the
company is using the extra capital to fund expansion, it can eventually lead to
increased capital gains for shareholders despite the dilution of the outstanding
shares as a result of the rights offering. 

For reassurance that it will raise the finances, a company will usually, but not
always, have its rights issue underwritten by an investment bank.