- What is ESOP?
· Employee Stock option plan or Employee Stock Ownership Plan (ESOP) is an employee benefit
scheme that enables employees to own shares in the company.
· These shares are purchased by employees at price below market price, or in other words, a
discounted price.
· This is an employee benefit plan that gives workers ownership interest in the company in the form
of shares or stock of the company.
· The purpose of providing ESOP is to make the employee more committed towards the company
and it also helps to retain employees.
2. Which companies can issue ESOP?
· Public company (whether listed or unlisted, provided listed companies must comply with SEBI
regulations)
· Private company & Startups (Compliance with Companies Act, 2013 and its rules is mandatory)
3. Eligible Employees for ESOP
i. Permanent employee of the company who is working in India or outside India
ii. Director of the company, including a whole-time or part-time director but NOT AN INDEPENDENT DIRECTOR.
iii. Permanent employee or director of a subsidiary company in India or outside India, or holding
company, or an associate company.
iv. Employees on probation
v. Employees on 3/4 years of contract if they are on payroll of the company
4. Employees / Directors ineligible for ESOP:
1. Employee who is belonging to the promoter group or is a promoter of the company
2. Director who either himself or through anybody corporate or through his relative holds more
than 10% of the outstanding equity shares of the company, whether directly or indirectly.
5. EXEMPTION: However, in case of startups the conditions mentioned in (1) and (2) shall not apply up
to five years from the date of its incorporation or registration, i.e., employees belonging to promoter
group or promoter of the company, director who along with any body corporate or his relative holds
>10% of outstanding equity shares of the company either directly or indirectly, shall be eligible for
ESOP.
6. Promotor:
a) the person or persons who are in over-all control of the company;
b) the person or persons who are instrumental in the formation of the company or programme
pursuant to which the shares were offered to the public;
c) the persons or persons named in the offer document as promoter(s). Provided that a director or
officer of the company if they are acting as such only in their professional capacity will not be
deemed to be a promoter.
Explanation: Where a promoter of a company is a body corporate, the promoters of that body
corporate shall also be deemed to be promoters of the company.
7. Promoter Group:
a) an immediate relative of the promoter (i.e. spouse of that person, or any parent, brother, sister
or child of the person or of the spouse);
b) persons whose shareholding is aggregated for the purpose of disclosing in the offer document
“Shareholding of the promoter group”.
8. Ways To Issue Shares Under ESOP
1. Direct Route
· Mainly fresh issue of shares is done thus employee becomes shareholder of the Company
· The Company issues stock options under ESOP to the eligible employees and such employees
after the vesting period is over, directly exercises their options and Company allots shares
against options exercised by the employees.
2. Trust Route
· A separate entity is created, which is called employee welfare trust.
· This trust keeps shares in a fiduciary position for the employees and whenever employee
exercises his option, trust transfers shares to the concerned employee who has exercised his
options.
· Existing shares and fresh issue of shares both options may be taken.
· If trust involves secondary market acquisition (further issue of shares), in such case acquisition
limit for each financial year is 2% of paid-up equity capital. And overall limit is 5% of paid-up
equity capital at any point time.
9. Applicability Of Various Laws To Issue Shares Under Employee Stock Option (ESOP)
1. The Companies Act, 2013 and rules made thereunder
· Section 62 (1) (b) of Companies Act, 2013 states that where at any time, a company having a
share capital proposes to increase its subscribed capital by the issue of further shares, such
shares shall be offered to employees under a scheme of employees’ stock option, subject to
special resolution passed by company and subject to such conditions as may be prescribed.
· Such prescribed conditions are mentioned in Rule 12 of The Companies (Share Capital and
Debentures) Rules, 2014
Conditions as per the Rule 12 of The Companies (Share Capital and Debentures) Rules, 2014-
· A company, other than a listed company, shall not offer shares to its employees under a
scheme of employees’ stock option (ESOP), unless it complies with the following requirements,
namely: –
a) The issue of Employees Stock Option Scheme has been approved by the shareholders of the
company by passing a special resolution.
The company shall make the following disclosures in the explanatory statement annexed to
the notice for passing of the resolution—
1. the total number of stock options to be granted;
2. identification of classes of employees entitled to participate in the Employees Stock
Option Scheme;
3. the appraisal process for determining the eligibility of employees to the Employees Stock
Option Scheme;
4. the requirements of vesting and period of vesting;
5. the maximum period within which the options shall be vested;
6. the exercise price or the formula for arriving at the same;
7. the exercise period and process of exercise;
8. the Lock-in period, if any;
9. the maximum number of options to be granted per employee and in aggregate;
10. the method which the company shall use to value its options;
11. the conditions under which option vested in employees may lapse e.g. in case of
termination of employment for misconduct;
12. the specified time period within which the employee shall exercise the vested options in
the event of a proposed termination of employment or resignation of employee;
13. and a statement to the effect that the company shall comply with the applicable
accounting standards.
Authored by CA Murli Chandak