Employee Stock Option Plan (ESOP) Services in India

Apply for Tax-Compliance

Employee Stock Option Plan (ESOP)

● DAn Employee Stock Option Plan (ESOP) is a program that allows employees to own a portion of the company they work for by granting them the option to purchase company shares at a predetermined price, typically after a certain period or upon meeting specific conditions. It is widely used as a tool for employee retention and motivation.

At GTS, we specialize in helping companies effectively implement Employee Stock Option Plans (ESOPs) as a powerful tool to attract, retain, and motivate top talent. We understand the importance of aligning your workforce’s interests with your company’s goals, and ESOPs are a proven strategy to create a culture of ownership and engagement among employees.

Our services cover every aspect of the ESOP process, including:

● Consultation on ESOP Policies: Expert guidance on structuring ESOPs to align with business goals.

● Drafting ESOP Schemes: Tailored schemes to suit your company’s needs and ensure regulatory compliance.

● Ongoing Compliance Support: We ensure your ESOP program adheres to all legal and tax requirements.

● Employee Engagement: We help communicate the benefits of ESOPs to employees, boosting participation and motivation.

What Is an ESOP or the Employee Stock Option Plan?

An Employee Stock Option Plan (ESOP) is a program that allows employees to purchase company shares at a predetermined price, typically lower than the market value, over a set period. This offers employees an ownership stake in the company, aligning their interests with the company’s growth and success.

● Draft Early: Prepare the SLA at the start of the process to allow ample time for consideration.

● Realistic Goals: Ensure the SLA is achievable and beneficial for both parties.

● Clarity: Clearly define the services offered to facilitate future assessments.

● Compensation Provisions: Include necessary compensation clauses for service failures.

● Timely Review: Avoid lengthy review processes to prevent service quality issues.

● Termination Options: Include provisions for terminating the agreement in case of significant failures.

● Employee Motivation: ESOPs align employees’ financial interests with the company’s performance. As the company’s market share price increases, so does the value of the employees’ stock options, encouraging them to work harder and more efficiently.

● Retention and Reduced Turnover: ESOPs serve as a long-term incentive, encouraging employees to stay with the company. Vesting periods ensure that employees remain committed for an extended time to fully benefit from the options.

● Reward for Hard Work: Employees are directly rewarded for their contributions, especially during challenging business phases. Their hard work can translate into increased company value and higher stock prices.

● Cash Flow Management: ESOPs are a non-cash incentive, meaning the company does not need to make immediate cash payouts. This helps in managing cash flow while still offering valuable employee rewards.

● Motivation & Retention: ESOPs create a sense of ownership, motivating employees and helping retain talent.

● Tax Benefits: Both employers and employees enjoy specific tax advantages.

● Cash Flow Preservation: ESOPs are a form of non-cash compensation, that preserves company cash.

Disadvantages of ESOP

● Dilution of Ownership: Issuing stock options dilutes the ownership of existing shareholders.

● Market Risk: The value of ESOPs is tied to the company’s stock price, which can fluctuate.

Here’s a simplified explanation of how ESOPs operate:

● Granting the ESOP: A company offers stock options to employees, typically as a part of their compensation package.

● Vesting Period: The ESOPs are held in trust for a specified period, known as the vesting period. During this time, the employees must stay with the company to earn the right to exercise their options.

● Exercising the Options: After the vesting period ends, employees can exercise their options. This means they can buy company shares at a predetermined price, usually below the current market price.

● Purchasing Shares: Once vested, employees can buy shares at the exercise price. This price is often lower than the market price, offering a financial advantage.

● Ownership: After purchasing, employees become shareholders and can either hold onto the shares or sell them, depending on the company’s policies and market conditions.

The eligibility criteria for participating in an Employee Stock Option Plan (ESOP) are typically determined by the employer. However, there are some common guidelines and restrictions:

● Minimum Age Requirement: According to the Indian Revenue Service (IRS), the minimum age for an employee to be eligible for an ESOP is typically 21 years. This ensures that the employee has reached a level of maturity and experience to understand the long-term benefits of participating in such a plan.

● Eligibility Upon Joining: The employee must be eligible for ESOPs in the year they join the company. This means that new employees can be included in the ESOP program immediately or after meeting the vesting requirements.

● Service Requirement: Employers may impose a minimum service requirement for eligibility. Typically, employees may need to complete a certain number of years of service (e.g., 2 years) before they qualify to participate in the ESOP. However, if the plan has immediate vesting, employees may be granted the right to exercise options without waiting for the service period to be completed.

Registering an ESOP involves several steps, from drafting the plan’s rules to getting approvals and ensuring compliance. Here’s an overview of the process:

Draft ESOP Rules
Create a document outlining the terms of the ESOP, including:

● Grant Letter: Details of the options to be granted.

● Exercise Notice: Form employees use to exercise options.

● Option Certificate: Records the number of options granted.

Approve Rules & Option Pool
Directors and shareholders must approve the ESOP rules and the option pool (total number of options available).

Board and Shareholder Approval
Obtain board approval for:

● ESOP rules.

● Total number of options.

● Authorization to grant options and issue shares.

● Shareholder Waivers
If there are pre-emptive rights, shareholders must waive them to allow the issuance of shares under the ESOP.

● Compliance& Reporting
Ensure regulatory compliance and timely reporting of ESOP activities.

● Prepare Directors’ Resolutions
Each time you grant options, have your corporate secretary prepare a resolution, approving the specific recipient’s options.

● Send Grant Letter to Recipients
Once the option is approved, issue a Grant Letter to the employee detailing the terms. This is followed by providing them with the Option Certificate (found in Schedule 3), which should be personalized and separate for each recipient.

Update Option Register
Maintain an Option Register internally, which records:

All granted options

Vesting schedules

Expiry dates

Exercise dates

By following these steps, you ensure a systematic and transparent process for granting and tracking employee stock options.

● Minutes of Board Meeting
A formal record of the meeting where the ESOP plan is discussed and approved.

● Special Resolution Approving ESOP
This includes the explanatory statement outlining the details of the ESOP plan for shareholder approval.

● Minutes of General Meeting
A detailed record of the general meeting where the shareholders approve the ESOP plan.

● Board’s Report
A report prepared by the board explaining the ESOP and its benefits, as required by regulations.

● Register of Employee Stock Option Plan
A record of all employees granted options, including vesting schedules, exercise dates, and other details.

● Form PAS-3
Filed with the Registrar of Companies to notify the issuance of shares under the ESOP.

● Form MGT-14
A form filed with the Registrar of Companies to approve the special resolution for the ESOP.

Yes, ESOPs offer several advantages for employees:

● Financial Incentives: Employees can buy company shares at a discounted price, offering potential financial rewards.

● Ownership Stake: Employees gain a sense of ownership, aligning their interests with the company’s success.

● Tax Benefits: ESOPs can provide tax advantages, such as lower capital gains tax rates.

● Diversification: Employees can diversify their investments by selling ESOP shares.

● Retirement Savings: ESOPs can serve as a valuable source of retirement income, especially if the company’s stock appreciates.

In short, ESOPs motivate employees, offer financial rewards, and provide long-term benefits.

● Increased Employee Engagement and Productivity
ESOPs give employees a stake in the company, making them more invested in its success and motivating them to work harder, boosting overall productivity.

● Improved Financial Performance
Companies with ESOPs often see better financial performance due to heightened employee motivation, commitment, and lower turnover rates.

● Tax Benefits
Employers can enjoy tax advantages, including deductions for contributions to the ESOP and the deferral of capital gains taxes when selling shares to the plan.

In summary, ESOPs help employers by improving engagement, reducing turnover, enhancing financial performance, and providing tax benefits.

● Ownership in the Company
ESOPs provide employees with a stake in the company, fostering a sense of ownership and pride in the company’s success. Employees are more likely to be motivated and take an active interest in the company’s performance.

● Potential for Wealth Creation
As the company’s stock price increases, the value of the employee’s ESOP shares also grows. Employees can sell their shares for profit or hold them for future gains, building wealth over time.

● Retirement Savings
ESOPs offer employees a valuable way to save for retirement. Shares are typically held in tax-advantaged retirement accounts, allowing employees to grow their savings without paying taxes on earnings.

● Job Security
ESOPs encourage long-term employment by incentivizing employees to stay with the company, contributing to both personal and company growth. This can enhance job stability and loyalty.

● Amend Articles of Association (AOA):
Ensure the AOA allows for ESOP issuance. If not, conduct an Extraordinary General Meeting (EGM) to amend it.

● Draft ESOP Scheme:
Prepare a draft ESOP scheme as per the Companies Act, 2013.

● Board Meeting:
Present and approve the ESOP scheme draft at a Board meeting.

● Shareholder and Director Approval:
Obtain approval from shareholders and directors via resolution.

● Discuss Pricing and Timelines:
Discuss share price and vesting timeline in the General Meeting, and pass the special resolution.

● File MGT-14 with RoC:
File the board resolution (MGT-14) with the Registrar of Companies (RoC) within 15 days.

● Pass Special Resolution:
Pass a special resolution in the General Meeting for the ESOP scheme.

● File MGT-14 (Second Filing):
File MGT-14 with RoC within 30 days of the special resolution.

Maintain ESOP Register:
Maintain a register (Form SH-6) recording all details of granted ESOPs.

● Attract and Retain Top Talent:
ESOPs are a powerful tool to attract skilled professionals and keep them committed to the company’s success, especially in competitive job markets.

● Motivate Employees and Improve Productivity:
When employees have a stake in the company’s success, they are more motivated to work hard, increasing overall productivity and performance.

● Reward Employees for Contributions:
ESOPs offer a way to reward employees for their hard work and long-term dedication, giving them a share of the company’s growth and success.

● Ownership and Pride:
ESOPs allow employees to own shares in the company they work for, fostering a sense of pride and connection to the company’s success.

● Wealth Building:
As the company grows, the value of the employee’s ESOP shares can increase, offering employees a significant opportunity to build wealth over time.

● Retirement Savings:
ESOPs can serve as an effective retirement savings plan, with employees benefiting from potential tax advantages while growing their savings for the future.

● Permanent Employees:
ESOPs can be granted to all permanent employees of the company, including those working in India or abroad.

● Directors:
ESOPs can be issued to directors, but not to independent directors.

● Subsidiary or Holding Company Employees:
Employees of the company’s subsidiaries or holding companies can also receive ESOPs, provided they meet the eligibility criteria outlined in the ESOP scheme.

● Promoter Group Members:
Employees who are members of the promoter group (but not promoters themselves) are eligible for ESOPs.

● Non-Employees:
ESOPs cannot be issued to non-employees such as consultants, advisors, or contractors. However, equity shares may be issued to them under specific conditions.

● Grant of ESOPs:

The company offers a specific number of shares, an exercise price, and a vesting period.

● Exercise of ESOPs:

Employees exercise their options after the vesting period, buying shares at the exercise price.

● Allotment of Shares:

Shares are allotted within 15 days after employees exercise their options.

● Transfer of Shares:

Shares are transferred to employees’ Demat accounts within 2 days.

● Payment:

Employees must pay the exercise price within 6 months of allotment.

● Compliance:

The company must follow SEBI regulations and file necessary reports.

● Reporting:

Periodic disclosures to the stock exchange and SEBI.

GTS simplifies the entire ESOP process with its expert legal and advisory services. Here’s how we can help:

● Feasibility Study: Assess whether an ESOP is suitable for your company.

● Valuation: Conduct a proper valuation to set a fair price for the shares.

● Legal Support: Our team of ESOP attorneys ensures compliance with all legal requirements.

● Funding: Assistance in securing funding for the ESOP plan.

● Operational Setup: Help establish and manage the ESOP process smoothly.

With GTS, you can navigate the complexities of ESOPs efficiently and legally, ensuring that your employees and business both benefit.

1. What is an ESOP

An Employee Stock Ownership Plan (ESOP) is a benefit plan that allows employees to own shares in the company they work for. It’s a form of employee benefit that can serve as a retirement plan, offering workers an opportunity to build wealth over time as the company grows.

2. Can the Exercise Price of the ESOP Be Less Than the Face Value?

Yes, the exercise price of ESOPs can be less than, equal to, or more than the face value, but it is typically set at the fair market value (FMV) of the shares. This is to avoid tax complications and ensure compliance with regulations like the Companies Act, 2013 and SEBI guidelines. Offering options below FMV could lead to tax liabilities, so it’s important to align the pricing with market value to prevent issues.

3. Can a private company issue an ESOP?

Yes, a private company can issue ESOPs to its employees, subject to certain conditions. The key limitation is that a private company cannot exceed the cap on the number of shareholders, which is restricted to 200 in a private company (excluding employees and former employees).

4. What happens to an ESOP when the company is sold?

When a company is sold, the treatment of ESOPs generally follows these scenarios:

ESOP Termination: The ESOP may be terminated, and employees receive cash proceeds based on the sale price of the company.

Rollover into New Company ESOP: If the company is sold to another company with an ESOP, employees may roll over their shares into the new company’s ESOP.

Accelerated Vesting: In some cases, vesting of ESOP shares may be accelerated, allowing employees to exercise and sell shares earlier.

The specific treatment depends on the ESOP terms and the sale agreement.

5. Is ESOP good for employees?

Yes, ESOPs are beneficial for employees. They provide:

Ownership: Employees gain a stake in the company, fostering pride and motivation.

Retirement Savings: ESOPs help build wealth for retirement.

No Cost: Employees typically don’t pay upfront for ESOPs.

Wealth Creation: If the company performs well, employees can benefit financially.

Talent Attraction: ESOPs help companies attract and retain top talent.

Get Started with Global Consultants

Submit your details below, and our experts will guide you through the process.