EMPLOYEE STOCK OPTION PLAN
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.
Thus, an Employee Stock Option Plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company in the form of shares or stock
of the company. One thing we should keep in mind that it is an option and it is not an obligation. If employee is willing to take such an option, he/she may take it and
vice versa.
Such plans are given to existing employees as reward based on tenure or on the basis of their performance. The purpose of providing ESOP is to make the employee more committed towards the company and it also helps to retain employees. In other words, ESOP motivates the employees to be committed towards the company for a long term and also take ownership of the company.
Eligible employees are required to complete a specified period with the company, as mentioned in the scheme of ESOP to claim the benefit of the ESOP. This period
is called vesting period. After the completion of the vesting period the employees become eligible to purchase the specified number of shares of the Company at predetermined price. Generally, the duration of vesting period is one year from the date of issue/grant of options.
MEANING OF THE SPECIFIC TERMS USED
Option: Means the option given to an employee that gives such an employee a right to purchase or subscribe at a future date, the shares offered by the
company, directly or indirectly, at a pre-determined price.
Employee Stock Option: Pursuant to clause (b) of Sub Section (1) of Section 62 of Companies Act, 2013, the Company can offer shares through employee stock
option to their employees if shareholders approve such scheme by way of passing special resolution subject to the conditions specified under Rule 12, of Companies (Share Capital and Debentures) Rules, 2014.
However, a Specified IFSC Public Company can offer shares through employee stock option to their employees through ordinary resolution.
Option Grantee: It means an employee having a right but not an obligation to exercise an option in pursuance of an ESOS. Regulation 2(1) (aa) of SEBI (Share Based
Employee Benefits & Sweat Equity) Regulations, 2021.
Meaning of Vesting Period: The ESOP vesting period is the time frame between when employees get their ESOPs and when they are able to exercise any attached
rights to options or shares. The employees are only able to obtain these shares once the ESOP vesting term has completed.
Exercise period: It means the time period which starts after the completion of vesting period within which an employee can exercise his/her right to apply for shares
against the vested options in pursuance of the scheme of ESOP approved by the shareholders in general meeting by way of Special Resolution.
Exercise price: Means the price payable by an employee for exercising the options granted in pursuance of the scheme of ESOP.
Watch this video to know more about ESOP
FAQs
Q1. What is an ESOP?
A. Thus, we can say that ‘ESOP’ stands for ‘Employee Stock Option Plan’ which is a kind of employee benefit plan that gives employees the right to purchase shares of their employer company at a pre-determined price after a certain time period.
Q2. Does the ESOP supplement the salary of an employee?
A. From the point view of monetary benefits, we can say that ESOPs are often used to supplement the salaries of employees. Instead of paying high salary, employees
may be offered ESOPs, which may generate more wealth for employees if the Company is growing and generating good amount of earnings which is over and above break-even point.
Q3. Is ESOP risky and having any possibility of monetary loss?
A. It may be risky, if an employee accepts ESOPs instead of a higher salary, and the organization where they are employed is not growing as per the market standards
or in comparison to its competitors, ESOP may result in monetary loss.
Q4. How does exercise price determine for ESOP?
A. Companies are free to decide the exercise price, which may be issued at a discount or premium but the exercise price determined by the Company shall not be less than the par value of the shares.
Q5. Does it mandatory for the Company to issue and allot only fresh shares under ESOP scheme?
A. No, it is not mandatory for the company to issue and allot only fresh shares under ESOP scheme, but it may choose either option:
1. If Company is willing to issue fresh shares, it should adopt direct route to issue and allot shares under the scheme of ESOP.
2. If the Company is willing to channelize its existing share only, in such case Company should adopt Trust route to issue and allot shares under the scheme of ESOP.
Q6. How are ESOP taxed in India?
A. ESOPs have dual tax effects:
1. When an employee exercises their rights and purchases company’s stock.
2. When the employee sells the stock after exercising the option.