The Employee Stock Option Plan (ESOP) is an employee benefit plan. It is issued by the company for its employees to encourage employee ownership in the company. The shares of the companies are given to the employees at discounted rates. Any company can issue ESOP. All companies other than listed companies should issue it in accordance with the provisions of the Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014. In the case of listed companies, they should issue in accordance with Securities and Exchange Board of India Employee Stock Option Scheme Guidelines.
Section 2(37) of the Companies Act, 2013 defines employees stock option as the option given to the directors, employees or officers of the company or of its holding or subsidiary company, the right to purchase or benefit or subscribe for the shares of the company at a predetermined price on a future date. Thus, ESOP is a scheme where a company proposes to increase its subscribed share capital by issuing further shares to its employees at a predetermined rate.
ESOP benefits the company as well as its employees. It benefits the startups where employees can be rewarded after the company goes public. Any employee of the company can be offered ESOP if they fit the criteria.
Rule 12(1) of Companies (Share Capital and Debentures) Rules, 2014 states that ESOP can be issued to the following employees-
A company cannot issue ESOP to the following employees-
However, the above two conditions do not apply to Startup Companies for a period of ten years from the date of its incorporation.
Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 (“Rules”) governs the issuance of ESOP. The procedure for issuance of ESOP under the Rules is similar to that of the procedure under the Securities and Exchange Board of India Employee Stock Option Scheme Guidelines for listed companies. The process for issuing ESOP by a company are:
There are three terms that are mainly focused on the time of issuance of shares through ESOP to the employees. They are as follows-
The company should make the following disclosures in the explanatory statement annexed to the notice for passing the special resolution for the issuance of ESOP-
ESOPs are an important form of remuneration for employees. It helps to maintain the liquidity of a startup and it acts as a reward for loyalty for the employees. Startups have found ESOPs to be an attractive motivation for joining a company besides the in-hand salary. ESOPs encourage a feeling of ownership in the employee, especially when they can’t afford very high compensation packages.
The legal provisions of ESOP do not explain the term – ‘Permanent Employee’ nor it has been defined under the Companies Act. Considering the practical aspects, in the case of listed and unlisted companies, an employee who has completed the probation period can be considered to be a permanent employee.
Yes, the ESOP scheme can cover both existing and future employees of the company, i.e. employees who join after the approval of the scheme.
No. A company can set the exercise price below the prevailing market price or at a discounted price but it cannot be below the face value of the shares.
Yes. The grants may be given to each employee or class of employees at a different exercise price on a discretionary basis.
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