What is Employee Stock Option Plan?

ESOP (Employee Stock Option Plan) is an employee benefit plan that provides employees an ownership interest in the organization. The Employee stock ownership plan can be issued as direct stock, profit-sharing plans or bonuses, additionally the employer has the sole discretion to decide who could avail of these options. The employers should follow the rules and regulations defined in the Companies Rules for granting the Employee stock ownership plans to their employees.

Under an ESOP, an employee gets the right to acquire company’s shares at a future date, subject to the terms and conditions of an option plan and regulations applicable.

How do ESOPs work?

An organization provides ESOPs to its employees to buy certain amount of shares of the company at a pre-determined price after the option period. Before the employ can exercise his option, he must go through the pre-defined vesting period which means that the employee should work for the organization until a part of the stock options or all of it can be exercised. 

What is the Importance of Employee Stock Option Plan?

Companies having well-crafted ESOPs are more likely to be productive, profitable and have lower employee turnover rates as the employees have a sense of ownership. The ESOPs are important to employees and for the company in the following manner.

For employees-

• Employees can become a part of the company’s success over a period of time;
• According to the plans, shares are generally given at a pre-determined price and the employees can benefit by selling the shares at a future point of time;
• These plans can be a great cause for motivation among employees and they can grow to new levels;
• Employee pays zero tax on the contributions to the ESOP.

For Company-

• Leverage the morale of the employees urging them to do better their daily tasks;
• Increases employee retention and lowers employee turnover rates;
• Save on director remuneration for the private limited company as part of the salary by providing a certain portion of ESOPs;
• With the ESOP option, companies can avoid cash compensation as reward and save on immediate cash outflow.

Regulations Governing Employee Stock Option Plan in India

The formulation of ESOP is governed by the following:

• Companies Act 2013;
• Companies (Share Capital and Debentures) Rules 2014;
• SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines 1999;
• SEBI (Share based Employee Benefits) Regulations 2014.

Different types of ESOPs

• Unleveraged ESOPs

The company performs periodic contributions to the plan that are used to purchase shares in the company. Through this, the company can reward long term employees.

• Leveraged ESOPs

Shares of the company are bought using borrowed funds. The loans are repaid by the company with regular contributions to the ESOP.

• Issuance ESOPs

This includes regular contribution to the plan consisting of newly issued shares of the company stock.

How to structure an ESOP?

• Check with other owners if they are amenable;
• Do a feasibility study;
• Conduct valuation;
• Hire ESOP attorney;
• Get funding for the plan;
• Establish a process to execute a plan.

Process to issue Employee Stock Option Plan

• Firstly prepare the list of eligible employees for ESOP;
• Then draft the ESOP policy and include the quantum of ESOP pool, right of option holders, rights of shareholders, exit mechanism and tax liabilities;
• Convene a board meeting for the final board approval. Board is required to approve the list of employees who are participating in the scheme, draft ESOP scheme;
• General meeting of members of the company should be convened for their approval of the ESOP scheme by special resolution;
• E-form MGT-14 has to be filed by all companies except by private limited company and attach special resolution for approval of the scheme, explanatory statement etc.;
• Company should send grant letter to all eligible shareholders after approval of shareholders to participate in the scheme;
• There should be at least 1 year of time gap between granting of option and vesting of option;
• Once the vesting period is completed, employees can apply for shares or wait till the last date on which exercise can be made or not apply for shares;
• If shareholders apply for the shares, then companies have to allot the shares and file e-form PAS-3 for the allotment of shares by attaching special or ordinary resolution for the approval of ESOP etc.
• The company should issue share certificate and pay stamp duty. They should issue share certificate to the shareholders in 30 days after the allotment. Companies also need to pay stamp duty on the issuance of shares.

Documents for ESOP-

• Minutes of the board meeting;
• Minutes of the general meeting;
• Special resolution approving ESOP with an explanatory statement;
• Boards report;
• Register of the ESOP
• MGT-14 and PAS-3.

We at Enterslice extend the following services to the organisations in devising their own ESOPs scheme and along with that: 

• Enterslice help in ESOP Valuations.
• We provide Fintech Support to handle employees of the company.
• We in Enterslice help in Planning, documentation, & drafting of ESOP Schemes.
• We help educate the employee on a stock action plan & guide them accordingly.

So to get a help with an ESOP, contact Enterslice today!