ESOP – Employee Stock Option Plan

WHAT IS ESOP?

Employee Stock Option Plan (ESOP) can be defined as Employee Benefit Plan, designed for the long-term benefits of the employees of the Organization by providing them with an option to participate in the equity ownership of the Organization by paying minimal amount of consideration.

 

WHY ESOP?

Employees are the core strength of the Business. Retaining a good employee is as important as hiring one. ESOP is considered as one of the most comprehensive and attractive tools for employee reward and retention. Through the process of ESOP, the employees are given a stake in the ownership of the Company, which results in boosting employee morale and loyalty towards the organization.

Mode of Issuance of ESOP:

As per Companies Act 2013, there are two modes of issuing ESOPS: Direct Route and Trust Route:

Direct Route: In case of direct route, the company grants the options to the employees directly. At the time of exercise, fresh equity issuance is allotted to the eligible employees that make them the shareholders of the Company.

Procedure under Direct Route:

  • Prepare an ESOP Scheme.
  • Approval of the Scheme by the Remuneration Committee, if any
  • Convene a board meeting to approve the scheme.
  • Convene the shareholders‟ meeting for approving the scheme. The notice to the shareholders meeting shall give out details with regard to the scheme.
  • Grant the Letter of Offer to the Eligible Employees for issue of Options.

Trust Route: The Trust Route is largely preferred by listed entities. In the trust route structures, the company creates a trust specifically for the purpose of running the ESOP schemes. Where the employees decide to exercise the option to acquire the shares, the trust would first acquire the shares from the Company or Secondary market and the transfer the shares in the name of the employees.

These employee welfare trusts are funded by the company to acquire the shares in the secondary market to be transferred to the employees upon exercise of the options. When the employees leave the company, the employees have the option of selling back the shares to the trust or in the secondary market.

The Companies Act, 2013 facilitates the company to make provisions of money involving purchase or subscription of its own shares for the purpose of issuing Employee Stock Options, subject to certain regulatory conditions, such as:

  • The scheme of provision of money shall be separately passed by special resolution in a general meeting
  • In case of listed Company, the Trust shall purchase the shares from the secondary market.
  • In case of unlisted Company, valuation of the shares purchased by the trust shall be done by an Independent Registered valuer.
  • The total value of shares in the trust shall not exceed 5%. of the aggregate of paid up capital and free reserves of the company.

Procedure under Trust Route:

  • Prepare and Approve an ESOP Scheme. Grant Letter of Offer to Eligible Employees.
  • Prepare a Trust Deed under the Indian Trusts Act and Register the same with the jurisdictional Sub-Registrar.
  • Obtain PAN for the Trust and Open Bank Account
  • Determine the value of the shares required to be allotted to the Trust for subsequent transfer to the employees.
  • Obtain Valuation Report from a Registered Valuer for the value of the Shares.
  • Provide Loan from the Company to the Trust to enable purchase of the required number of Shares at the pre-determined price.
  • Allotment of Shares to the Trust
  • Transfer/Sale to Shares from the Trust to the eligible employees respectively at the Exercise Price as determined in accordance with the ESOP Scheme
  • On receipt of Exercise Price, repayment of Loan from the Trust to the Company
Other compliances: 

Conditions regarding appointment of trustees:

Any person can be appointed as the trustee of the ESOP Trust, except for the following:

  • The directors, Key Managerial Personnel and their relatives of the company, its holding, subsidiary or associate company;
  • Any person beneficially holding more than 10% of the paid-up share capital of the company.

Disclosure in Directors’ Report: Once the scheme has been initiated, the company shall in its Directors Report for the year also specify the details of the ESOP scheme as per the provisions of the Companies Act and the relevant Accounting Standards.

Maintenance of Register: The company shall maintain a Register of Employee Stock Options in Form no. SH.6 and shall enter therein the particulars of option granted.

Nikita Bhatia is the co-founder of VenturEasy, an online platform for Company registration, book-keeping, accounting, tax consultancy and legal compliances in India. A Chartered Accountant and company secretary by profession, she has wide experience in the fields of audit, accountancy, taxation and corporate governance.