Q.What is meant by an Employee Stock Option Scheme (ESOS) and sweat equity shares?

Both ESOS and sweat equity reward a company's own people with shares, but one is an option to buy later, and the other is a share given now for a contribution already made.

An Employee Stock Option Scheme, permitted under Section 62(1)(b) of the Companies Act, 2013, is a scheme under which a company grants its employees and directors an option — deliberately not an obligation — to apply for and be allotted the company's shares, at a price fixed in advance, at some future date. The scheme must be approved by the shareholders through a special resolution, and a minimum vesting period of at least one year must elapse between the date the option is granted and the date it actually vests (becomes exercisable). Because the exercise price is fixed at the time of grant, an employee benefits if the company's share price rises above that fixed price by the time the option vests, which is precisely the incentive the scheme is designed to create: it ties an employee's personal financial reward to the company's own long-term growth and performance, encouraging loyalty and effort well beyond what a fixed salary alone would. …

A frequent mix-up is treating ESOS and sweat equity as the same thing because both benefit employees; the key difference is timing and nature — ESOS is a future option to buy at a fixed price, while sweat equity is an immediate allotment …