Difference Between Right Shares and ESOP

Right shares and ESOP are terms used in Stock markets. Companies do require funds and at times reserves and profits earned do not seem to be enough while expanding business.

Right Shares vs ESOP

The difference between Right shares and ESOP is that they target two different stakeholders. Right shares tend to target the already existing shareholders of the company. Whereas, ESOP targets the employees.

Right Shares vs ESOP 1

Right shares of a company’s existing shareholders sanction them to buy additional shares directly from the company in proportion to their existing shareholding but at a discount to the current market trading price.


 

Comparison Table

Parameter of ComparisonRight Shares  ESOP
BuyersRight shares are given only to the shareholders of a company, and not to the employees of the company. ESOP is provided only to the employees and is not concerned about the shareholders or even the general public.
PurposeRights shares are given to their shareholders when they require expanding the company or just require working capital. ESOP is given to the employees as incentives and to make them happy ensuring them to stay in the company for a long period.
Shares to be sold In the case of the right shares, the shareholder can immediately sell the shares at the available market price since they are credited much faster in the accounts of the shareholders. In ESOP, there is a lock-in period ranging from 5 months to 10 years, which prohibits the employees from selling the shares immediately.
Listed companies Only listed companies are allowed for Rights share. ESOP allows both listed and unlisted companies. In the case of an unlisted company, ESOP gives an option to their employees of exercising their rights, whenever promoter is selling their company to other listed ones.
ComparisonRight shares are analogous to an ATM, where cash is available readily.ESOP is analogous to fixed deposits which mature after a certain period.

 

What are Right Shares?

Right shares are the ones that are issued by the company following the issue of the original shares but at a discounted price rather than buying in the Secondary market, as stated in the 81(1) of the Companies’ Act, 1956.

The offer of the Right shares is made in the form of a notice stating the details of the shares offered to limit to a span of 15 days, and if the existing shareholders fail to accept the offer within that span, these shares are given to new members.

Features of Right shares:

  1. When companies wish to expand their business, or need cash for various other objectives they tend to undertake Right issues.
  2. Right Shares give the existing shareholders a preference to buy the shares at a discounted price on or before a specified day.

Reasons for a Rights Share:

  1. When the company is expanding its business, it will require a huge capital amount. To raise that amount of capital, a rights share is a faster way rather than opting for a debt.
  2. Companies often get projects where debt/loan is not suitable, or might not be available, or maybe even expensive. In those cases, to raise funds, the company undertakes the Right shares.
right shares
 

What is ESOP?

To begin with, ESOP is the abbreviation for Employee Stock Ownership Plan. An Employee Stock Ownership Plan is a plan made to benefit the employees giving them an ownership stake in the company.

The shares for ESOP are held in a trust unit until the employee resigns or retires from work. After their term of service, the company buys the shares back to further allocate among other employees. 

The procedure of work:

  1. Prior to starting an ESOP, the company should create a trust to contribute to new shares or cash to purchase existing ones.
  2. The shares of an ESOP are required to be vested before distributing to employees.

Benefits of ESOP:

  1. Tax benefits- Employees need not pay taxes in contribution to an ESOP. They are taxed only when they exit or after retirement.
  2. Improved way of managing employees- Companies having ESOP are seen to have better employee involvement.
esop

Main Differences Between Right Shares and ESOP

  1. The shares can be immediately sold in the current market price in the case of the right shares because they are credited much faster in the accounts of the shareholders.
  2. Right shares can be calculated theoretically. To find out the value of rights, let us assume a stock price of a share to be $50 and subscription price to be $40 and four rights are needed to buy one share, then price of one right would be=$(($50-$40)/(4+1))= $2. Whereas, the perquisite value is calculated for ESOP.

References

  1. https://www.bvreview.org/doi/pdf/10.5791/0882-2875-18.3.100
  2. https://search.proquest.com/openview/96870bf38020de8f9cc5a486e7e40fc7/1?pq-origsite=gscholar&cbl=41798
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