Employee Stock Ownership Plan Or ESOP
What are ESOP?
Employee Stock Ownership Plan or popularly known as ESOP, is a qualified and well defined plan meant to benefit both employee and employer, in which a employee primarily invest in the stock of the sponsoring company.
The primary aim of the ESOP is used to maintain the focus of the employees on the company’s performance and to contribute more and more in share price appreciation. By giving employees an interest in company’s performance, a company believes it would encourage participants to give their best for the company and its shareholders , as they themselves are shareholders now.
How does ESOP works?
A company is which employee is working gives an opportunity to that employee to buy a pre-fixed number of shares of the company at a price which is lower than the market value and vest it after certain number of years, known as option period.
What does ‘Grant’ and ‘Vesting’ of the ESOP option mean?
Grant of the ESOP refers to the commitment that an employer makes by informing the employee of the eligibility of the available options. Vesting of the ESOP means giving right to the employee to own share over the period of the time.
Documents Requirement For ESOP Allotment
Tax Benefit under Section 12A – to NGO
Although each company has its own purpose of issuing ESOP , certain employees are not permitted under the scheme:
What are the various option plan available for the Employees?
Although they are many plans available , few prominent ones are :
The selection criteria would depend entirely upon what is object with which ESOP plan is being implemented . For an instance, if the objective of the company is to reduce attrition rate, they would keep vesting period longer than normal.
What are the legal compliance to be taken care for implementing of ESOP scheme?
Even the smallest thing in a company has some laws to be followed, same goes for ESOP scheme. The legal compliance to be taken care of while implementation of ESOP scheme are:
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No Options are not for lifetime. Either when an employee is terminated or on the expiry of the exercise period, Option lapse depending on the conditions mentioned by the employer. Once an Option is lapsed , it cannot be converted to the shares.
ESOPs are not shares in itself. Therefore, they cannot be transferred but once they are converted to the shares, an employee can freely transfer them subjected to terms and conditions stated by the company.
In case the holder of ESOP dies before lapsing of the option, they vest in his/her legal heir or nominee.
| ESOP | Sweat Equity | Phantom Shares | |
|---|---|---|---|
| Mode of Consideration | Cash | Cash/ Cash+IPR’s/Fully non cash | Cash/Equivalent number of shares |
| Lock In Period | Not Specified | 3 years | Not Specified |
| Pricing Guidelines | Not Defined | Defined | Not Defined |
| Separate Register Requirement | Not to be maintained | To be maintained | Not to be maintained |
| Restriction on percentage issued of by Unlisted Companies | No such restriction | Not more than 15% without approval | No such restriction |
| Eligibility Criteria | Cannot be issued to promoter or those belonging to that group | Can be issued to Employees, Directors and Officers of the company. | Employees, Directors, Third Party Vendors |
