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Companies Act ESOP

The Employee Stock Option Plan: Empowering Employees for Ownership

July 12, 2023 by Team Instabizfilings

Blog Details

The Employee Stock Option Plan (ESOP) is a valuable employee benefit plan designed to foster employee ownership within a company. It allows companies to offer shares to their employees at discounted rates, encouraging a sense of ownership and commitment. ESOPs can be issued by any company, with different guidelines for listed and non-listed companies. Non-listed companies must adhere to the Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014, while listed companies must follow the Securities and Exchange Board of India Employee Stock Option Scheme Guidelines.


Under Section 2(37) of the Companies Act, 2013, an employee stock option refers to the right given to directors, employees, or officers of the company, its holding or subsidiary company, to purchase, benefit from, or subscribe to company shares at a predetermined price on a future date. Essentially, ESOPs allow companies to increase their subscribed share capital by issuing additional shares to employees at a predetermined rate.


ESOPs offer significant benefits to both companies and employees, particularly startups where employees can be rewarded after the company goes public. Any eligible employee can be offered an ESOP based on specific criteria.


ESOPs can be issued to permanent employees working in India or abroad, directors (including whole-time or part-time directors, excluding independent directors), and employees or directors of subsidiary, holding, or associate companies. There are certain restrictions on issuing ESOPs to employees belonging to the promoter group, directors holding more than ten percent equity shares, or their relatives. However, these restrictions do not apply to startup companies for ten years from their incorporation date.


The issuance process of ESOPs is governed by Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014. This process is similar to that outlined in the Securities and Exchange Board of India Employee Stock Option Scheme Guidelines for listed companies. The steps involved in issuing ESOPs include preparing the draft scheme, convening board and general meetings, passing resolutions, filing necessary forms with the Registrar of Companies, and sending options to employees, directors, and officers of the company. Private companies must ensure that their Articles of Association authorizes the issuance of shares through ESOP and, if not, amend them accordingly.


ESOPs have three key stages: grant, vest, and exercise. Grant refers to the issuance of stocks to employees, notifying them of their eligibility for ESOPs. Vesting is the right of employees to apply for the shares granted to them, typically with a minimum one-year gap between grant and vesting. Exercise is the period in which employees can exercise their option to purchase shares, with the company having the freedom to specify any lock-in periods for the shares.


During the issuance of ESOPs, companies are required to disclose certain information in the explanatory statement attached to the special resolution. This includes the total number of stock options to be granted, eligible employee classes, vesting period requirements, exercise price and process, lock-in periods (if applicable), maximum number of options per employee, methods used to value options, conditions for lapsing options, and a commitment to comply with applicable accounting standards.


Frequently Asked Questions:


1. Is ESOP beneficial for employees?

ESOPs are highly beneficial for employees as they provide an additional form of remuneration and serve as a reward for loyalty. ESOPs maintain liquidity within startups and act as a motivation for employees to join a company, particularly when compensation packages may not be high. ESOPs foster a sense of ownership and engagement among employees.


2. Who is considered a permanent employee for ESOP issuance?

The Companies Act does not explicitly define the term "permanent employee." In practice, for both listed and unlisted companies, employees who have completed their probation period can be considered permanent employees.


3. Is it possible to include future employees in the ESOP scheme?

Absolutely! The ESOP scheme can encompass not only existing employees but also those who join the company after the scheme's approval. This ensures that future employees have the opportunity to participate in the ESOP and benefit from its advantages.


4. Can the exercise price of ESOPs be below the face value?

No, the exercise price of ESOPs cannot be below the face value of the shares. However, companies have the flexibility to set the exercise price below the prevailing market price or at a discounted rate.


5. Can the exercise price differ for each employee on the same exercise date?

Yes, companies have the discretion to offer grants to each employee or class of employees at different exercise prices.


In conclusion, when it comes to expert advice and assistance on Employee Stock Option Plans (ESOPs), Instabizfilings is your go-to partner. With a team of experienced professionals and deep expertise in handling ESOPs, they can provide valuable guidance to companies and employees alike. Whether you need assistance in designing an effective ESOP scheme or navigating the legal and regulatory aspects, Instabizfilings can offer comprehensive support. Ensure the successful implementation of your ESOPs by partnering with Instabizfilings for expert insights and personalized solutions. Get in touch with their team today to unlock the full potential of your employee ownership program.

Please note that the information provided here is for informational purposes only and does not constitute legal or professional advice.

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