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Rules for Issuing ESOP in India (2022)

Rules for Issuing ESOP in India (2022)

An employee benefit plan is the Employee Stock Option Plan (ESOP). It is distributed by the business to its staff to promote employee ownership of the business. Employees receive discounted prices on the shares of the company. Any business may issue ESOP. It must be issued in compliance with the requirements of the Companies Act of 2013 and the Companies (Share Capital and Debentures) Rules of 2014. This applies to all businesses other than those that are publicly listed(ESOP for private companies). The Securities and Exchange Board of India Employee Stock Option Scheme Guidelines should be followed by listed businesses while issuing employee stock options.

Employee stock options are described in Section 2(37) of the Companies Act, 2013, as the right granted to directors, employees, or officers of the company or of its holding or subsidiary company to acquire, benefit from, or subscribe to the shares of the company at a certain price at a future period. Accordingly, an ESOP(employee stock option plan)  is a plan where a business suggests increasing capital subscribed by issuing several shares at a fixed rate to its employees.

Both the corporation and its workers gain from ESOP. It is advantageous for startups when workers may get rewards once the business goes public. If they meet the requirements, any employee of the firm may be given an ESOP offer.

ESOP Benefits for Employees

Employee stock ownership programmes are frequently used by businesses as a recruitment and retention strategy for top talent. Stocks are typically distributed by organizations in stages. For instance, a business may provide its employees shares at the end of the fiscal year as an incentive to remain with the firm in exchange for getting that award. Businesses that provide ESOPs have long-term goals. Companies want to keep their employees for a long time, but they also want to turn them into shareholders.Start-ups sell stocks to recruit personnel. The majority of IT firms have frightening turnover rates, which ESOPs might help them reduce. These businesses frequently lack funds and are unable to pay their employees well. However, they raise the value of their remuneration package by providing a stake in their company.

Employee stock ownership schemes are regarded as benefits for tax purposes. On the other hand, ESOPs are taxed for an employee in the following two situations: During physical activity, as a must. The difference between the Fair Market Value (FMV) as of the date of exercise and the exercise price is taxed as a prerequisite when an employee exercises his option. in the form of capital gain upon selling. After purchasing shares, a worker could sell them. He would be subject to capital gains tax in the event that he sold these shares for more than their FMV on the exercise date. The taxation of the capital gains would depend on the holding term.

Taking into account the date of exercise through the date of sale. If equity shares that are traded on a recognised stock exchange are kept for a period of time greater than one year, or longer than 12 months, they are regarded as long-term capital. The shares are regarded as short term if they are sold within a year. At the moment, listed equity shares’ long-term capital gains (LTCG) are tax-free. However, as per the most recent Budget 2018 revisions, sales of equity shares held for more than a year on or after April 1, 2018, will be subject to a 10% tax and 4% cess. The tax rate on short-term capital gains (STCG) is 15%.

Adopting an ESOP has several advantages that are beneficial to both owners and employees(esops to employees )

 Five benefits to think about are as follows:

1. Higher Productivity

The majority of ESOPs we work with are in sectors where employee loyalty is high but 401(k) membership is low. Individual workers will immediately benefit from a company’s success and will experience a feeling of ownership since an ESOP provides them a stake in the business. For businesses with employee stock plans, this might result in a rise in productivity and an improvement in overall performance. Employee morale and trust in the organisation may rise when they have a financial stake in the company.

2. Tax Benefits

ESOP schemes provide several tax benefits. Contributions to ESOPs are tax deductible for C-corporations, and the amount of an S-corporation held by an ESOP is tax-free. Employees are not subject to tax on their contributions. Individual employees only pay taxes on the ESOP when they finally collect the money after retiring, much like with a traditional retirement account. In addition, payments used to pay back ESOP loans and stock donations are also tax deductible.

3.  Alternative Exit Plan for Elderly Owners

As was already said, it is currently less typical to pass on family enterprises. Additionally, company owners wishing to retire had fewer alternatives since COVID-19 decreased merger and acquisition (M&A) activity. Owners may ensure that their business will be held by the employees by establishing an ESOP; they won’t have to sell it to a third party. Additionally, their information can be kept private and not disclosed to potential purchasers.

Shares can be contributed to ESOP benefits over time as opposed to all at once by owners who decide to stay active in their company for a while.

4. Recruiting the Best Talent and Retaining Employees

Employees who work for a firm for less than two years frequently lose their stock. When an employee leaves after four years of service, they might earn 40% of their shares. Employees are encouraged to stay with a business for as long as possible in order to earn the largest payment if and when they decide to leave through the vesting process, which is the length of time an employee must work for a firm in order to be eligible to collect their share payout. For top individuals looking for new work possibilities, the chance to own stock in a firm may be an alluring perk since it offers a safe retirement plan.

 5.  Governance is unchanged

With an ESOP in place, an owner may move away from their company without worrying about the upheaval that results from a shift of governance. In addition to keeping management on board, this enables the business to preserve ties with long-term clients, distributors, and suppliers. Employee loyalty to the firm can also be increased by having the stability of employee ownership, without the changes normally associated with new ownership.

Various ESOP Plan Options

A ESOP plan may be executed in a number of ways, including (a) ESOPs and (b) Employee Stock Purchase Plans (ESPP) (b) Cash and Stock Appreciation Rights (SAR) (d) Equity Stock Appreciation Rights Restrictive Stock Unit (e) (RSU).

ESOP: An employee stock ownership plan gives employees the option to purchase business equity at a reduced price and ESOP benefits for employees.

ESPP: This programme enables employees to buy the company’s stock, sometimes for less than fair market value.

Employees who get RSUs are granted shares pending the satisfaction of certain underlying requirements and ESOP benefits for employees. The requirements might be based on a target, revenue, or performance.

SAR: Under this plan, the employee will receive the difference between the date of award and the last day of option exercise in the form of cash or equity.

Who Can Receive The ESOP?

  • According to Rule 12(1) of the 2014 Companies (Share Capital and Debentures) Rules, the following employees(esops to employees) are eligible to receive an ESOP:
  • a company’s long-term worker who is based in or outside of India.
  • A director of the corporation, whether they are employed full-time or part-time; independent directors are not included.
  • a permanent worker or director for a holding firm, an affiliate business, a subsidiary business operating in India or abroad.

The following employees are ineligible for ESOP(employee stock option plan) from their employer:

  • a worker who represents the firm or is a member of the promotion group.
  • A director who possesses more than 10% of the outstanding equity shares of the firm, whether directly or indirectly, directly or via anybody corporate or through a family

However, for 10 years following the date of establishment, Startup Companies are exempt from the aforementioned two restrictions.


Process of ESOP Issue

The issue of ESOP is governed by Section 62(1)(b) of the Companies Act of 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules of 2014 (the “Rules”). The rules’ issuing of the ESOP method is comparable to those of listed businesses’ Employee Stock Option Scheme Guidelines under the Securities and Exchange Board of India. A company’s procedures for granting ESOPs are as follows:

  • Create the ESOP document in compliance with the 2013 Companies Act and its rules.
  • Prepare the board meeting notice and the proposed resolution for adoption at the meeting.
  • At least seven days before the meeting, all directors should receive a notice of the board meeting.
  • Establish the price of the shares to be issued under the ESOP, establish the time and date, and authorise summoning the general meeting to adopt a special resolution for issuing the ESOP. Pass the resolution for the issuance of shares through the ESOP.
  • Within fifteen days after the board meeting’s conclusion, provide the draught minutes to each director, and upon the board’s adoption of a resolution, submit the MGT-14 form with the Registrar of Companies.
  • All of the company’s directors, auditors, shareholders, and secretarial auditors must get notice of the general meeting at least 21 days before the scheduled date of the meeting.
  • Pass the special resolution authorising the general meeting to issue ESOP shares to the company’s workers, directors, and officers.
  • Within thirty days of the general meeting approving the special resolution, submit the MGT-14 form and the supporting paperwork to the Registrar of Companies.
  • Send stock purchase options to the company’s directors, officials, and staff members.
  • Keep track of the details of the ESOPs awarded to the company’s workers, directors, and officers in a “Register of Employee Stock Options” on Form No. SH-6.
  • If a private firm intends to issue an ESOP share(esop for private companies), it must make sure that the issuing of shares through an ESOP is authorised under the articles of association (AoA). If the AoA does not authorise the issue of shares through ESOP, the firm must first convene an extraordinary general meeting to amend the AoA to add those provisions before proceeding to hold the board meeting to approve the resolution and get shareholder approval for the ESOP Scheme.

Distribution of ESOP

The timing of the issuing of shares through an ESOP to the employees is primarily governed by three terms. The list is as follows:

  • Grant: By “grant,” we imply the distribution of shares to employees. It entails alerting the worker of his ESOP eligibility. While giving the employees the option of an ESOP, the corporation will be allowed to choose the exercise price.
  • Vest: The ability of the awarded workers to apply for their shares is referred to as the vest. For the ESOP plan, there must be a minimum of a year between the option’s award and vesting.
  • Exercise: Employees may exercise their right to purchase shares throughout the exercise period. The lock-in period for the shares issued (if any) following the execution of the option may be determined at the company’s discretion. Before the shares are issued upon the execution of his option, the employees will not have the right to dividends, the right to vote, or the privileges of a shareholder with respect to the ESOP share provided to him.

Information Should Be Disclosed When Issuing ESOP(employee stock option plan)

In the explanation statement attached to the notice for approving the special resolution for the issue of ESOP, the firm shall disclose the following disclosures:

  • How many stock options will be awarded overall,
  • The specified group of workers that are eligible to take part in the ESOP,
  • requirements for the ESOP’s vesting time,
  • maximum time frame for vesteding the options,
  • the cost of exercising and the exercise method,
  • If any, the lock-in period
  • the granting of a worker’s maximum number of options,
  • The techniques the business employed to value its options,
  • The criteria for the expiration of employee stock options,
  • a declaration that the business would adhere to the relevant accounting rules.


The Companies Act of 2013 regulates corporations and allows for the allocation of shares to company employees. At least 75% of the shares must vote in favour of the ESOP. In certain instances, the corporation offers the employee shares in exchange for their wage at a set price. Both the employee and the employer of the firm gain from this approach.


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