ESOPs, Sweat Equity Shares, and Phantom Stocks in India: A

Comparative Breakdown
Regulations:

 Companies Act, 2013: Section 2(37) defines ESOPs and Sweat Equity.
 SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021: Supersedes
previous regulations and governs all three instruments.

Key Features:

ESOPs (Employee Stock Option Schemes):

 Grant employees right to purchase shares at a pre-determined price (exercise price) in the
future.
 No upfront payment required.
 Shares issued only after exercising the option (vesting).
 Lock-in period after vesting can be set by the company.
 No limit on issuance amount.

Sweat Equity Shares:

 Issued to employees or directors for intellectual property (IP), know-how, or other value
additions.
 Issued at a discount or for non-cash consideration.
 Three-year mandatory lock-in period.
 Maximum issuance in a year: 15% of paid-up capital or INR 5 crore, whichever is higher.
 Total issuance cannot exceed 25% of paid-up capital.
 Startups may issue up to 50% of paid-up capital within 5 years of incorporation.

Phantom Stocks:

 Not actual shares but represent rights to cash or equity-linked benefit based on company
performance.
 No ownership rights in the company.
 Flexible design allows for diverse benefits (e.g., appreciation, dividends).
 Not governed by SEBI regulations.
 Accounting treatment as a liability.