By - Suma RV on October 4, 2022
Frequently Asked Questions
Employee Stock Option Plans (ESOPs) enable organizations to recognize and reward top performers who contribute to the success of their organization by awarding them an equity stake or a cash payment based on an equity investment. Employee stock options in India may or may not be included in total compensation packages. It serves as an effective tool for motivating recipients to make long-term commitments, making them a crucial component of a successful company’s growth story.
The purpose of employee stock options is generally to retain the right talent, reward their performance and encourage employees to purchase stock in the sponsoring company. They are often offered at a predetermined price. This encourages employees to link their performance to shareholder interests. These shares will be held in trust until the employee exercises their options or retires from the company. Exercise of options will be at the discretion of the employee; and in case of resignation, unexercised options will get cancelled.
The Companies (Share Capital and Debentures) Rules, 2014 define an ‘employee’ as any individual who works permanently for a company, including directors (whether or not they are full-time directors and/or based in India). Under Rule 12(1), employee stock options may be granted to any permanent employee, any non-independent director, and any permanent employee or director of a subsidiary, affiliate, or holding company. However, a business cannot provide an ESOP to an employee if the employee is a member of the promoter group or one of the company’s promoters, or if the director in question directly or indirectly owns more than 10% of the company’s outstanding equity shares. That said, startups are exempt from this for ten years after their creation.
The issue of ESOPs is governed by Section 62(1)(b) of the Companies Act, 2013, and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. The listed companies should also adhere to relevant guidelines issued by the Securities and Exchange Board of India. The process is as follows for an unlisted company, provided that the Articles of Association of the company authorized for issuance of shares through ESOP:
To allot the Employee Stock Options, there are three stages. They are:
Furthermore, before the aforementioned special resolution is passed, the specifics of the approach must be disclosed. The specifics should be disclosed in the form of an explanatory statement, which must include information such as:
Employees often pay a modest price to purchase the shares allotted to them while exercising their ESOPs. As a result, they can invest in the company at a discounted rate.
Employers generally use employee stock ownership plans in India as a recruitment and retention strategy for top performers. Stocks are frequently distributed in stages by corporations. Companies aim to retain long-term employees while also converting them into shareholders. In India, cash received through employee stock option programs may be used to purchase company shares and existing shareholder shares. Contributions to an ESOP are tax-deductible if utilized to repay the outstanding loan. Both principal and interest are tax-deductible. Furthermore, private company shareholders can sell their shares through the ESOP. Companies can purchase their shares from money received from the ESOPs or make tax-deductible donations to the Employee Stock Option Plan.
An employee does not pay taxes on their shares while held by Employee Stock Option Plan. If they quit the company or retire, they can sell their stock on the open market or sell it back to the company.
Yes, the ESOPs scheme can also include future employees.
Companies today commonly use ESOPs to maintain and improve employee performance, benefiting both employers and employees. Employee Stock Option Plan are especially beneficial for startups that are unable to pay their employees as competitively as larger firms. Giving employees a part in the company helps these startups recruit talent. They are undeniably beneficial to both businesses and employees. Motivated employees contribute more successfully to the company’s goals.
They align their goals with the goals of the organization. On the other hand, the company’s success is dependent on the quality of its employees’ labour. The distribution of Employee Stock Option Plan to all employees by companies in India has expanded awareness of the benefits of such plans and has begun to significantly contribute to the differentiation of companies that reward employees who are willing to align themselves with the company’s long-term goals.