Sweat Equity Shares and ESOPs : New amendment for Employee Incentives in Nepal

January 22, 2025

The recent amendments to the Company Act, 2063 of Nepal bring significant changes aimed at incentivizing key contributors, retaining employees, and rewarding non-cash contributions. These updates, focusing primarily on Sweat Equity Shares and Employee Stock Ownership Plans (ESOPs), introduce innovative ways for companies to grow while motivating and rewarding their teams.

Sweat equity shares allow companies to recognize and reward contributions made in non-cash forms, such as intellectual property, value-added services, and goodwill. This provision is particularly beneficial for startups and companies seeking to attract and retain talent or acknowledge the efforts of key contributors. These shares can be issued to founders or employees who have made significant contributions. However, the valuation of such contributions must be certified by a qualified engineer or accountant as per prevailing laws. To issue sweat equity shares, companies must pass a special resolution during their general meeting, and they may decide to issue the shares at a discounted rate.

For general companies, sweat equity shares cannot exceed 20% of the company’s paid-up capital. Startups, however, are granted greater flexibility, with the limit increased to 40% of the paid-up capital. This differentiation acknowledges the unique challenges and growth trajectories of startups, enabling them to better leverage this provision.

Similarly, the introduction of ESOPs marks another significant step forward. ESOPs offer companies a structured way to issue or sell shares to their employees, including those working in subsidiaries or holding companies. This initiative helps align employee interests with the company’s growth and performance.

Before implementing an ESOP, companies must pass a special resolution at the general meeting. The ESOP plan must include details such as:

1. The number of shares to be issued or sold

2. The list of eligible employees

3. The duration of the purchase window

4. The purchase price

5. The maximum shares each employee can purchase

6. Other relevant terms and conditions

Employees who purchase shares under an ESOP are subject to certain restrictions. They cannot sell or transfer these shares during the lock-in period specified by the company. Additionally, only employees employed during the purchase window are eligible to participate in the ESOP. If an employee does not purchase the allocated shares during this window, the company has the discretion to reallocate the unused shares to others.

These amendments to the Company Act, 2063 signify a progressive step in Nepal’s corporate framework. By incorporating modern practices such as sweat equity and ESOPs, companies can attract and retain talent, support founders and innovators, and align employee interests with organizational success. 

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Author Detail

Mukhoo Shrestha

Corporate Legal Consultant

To reach: mukhushrestha024@gmail.com