Employee Stock Option Plans, popularly known as ESOPs, is a scheme of selling shares to the employees by which they become a shareholder in the company and thus hold a certain small level in the ownership of the company.
As per Section 2(37) of the Companies Act, 2013:
“Employees’ stock option” means the option given to the:
Directors, officers or employees of a company or
Its holding company or subsidiary company or companies, if any,
Which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe to, the shares of the company at a future date at a pre-determined price.
a permanent employee of the company who has been working in India or outside India; or
a director of the company, whether a whole time director or not but excluding an independent director; or
an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company
but does not include-
an employee who is a promoter or a person belonging to the promoter group; or
a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company.
The option provided under this scheme confers a right but not an obligation on the employee. Stock options are subject to vesting that requires continued service over a specified period of time. Upon vesting of options, employees can exercise the options to get shares by paying the pre-determined exercise price.
ESOPs are generally awarded for performance or tenure of the employee with the company.
Thus, it serves a two-fold purpose for both the company and the employees.
1. It acts as a tool of motivation for the employees that once they own a stock they feel responsible for the performance of the company, as it determines the value of the stocks of the company. 2. It helps the employer to retain the company and assure a good level of performance in the work.
ADVANTAGES OF ESOPs
ESOPs provide advantages like:
It is a non-cash compensation tool to compete for the best human resources.
It gives an opportunity to corporate to pay without a reduction in book profits.
The sense of Ownership and Belongingness amongst the Employees.
Boosted Morale of Employees.
Greater Effort on the Part of Employees.
More Equitable Distribution of Profits.
PROCEDURE FOR ISSUE OF ESOP IN UNLISTED COMPANY
1. Draft the ESOP scheme.
2. Convene the Board Meeting and pass the scheme.
3. Call the general meeting to approve the scheme by Shareholders.
4. The following disclosure will be made in the explanatory statement annexed to the notice for passing of the resolution-
the total number of stock options to be granted;
identification of classes of employees entitled to participate in the Employees Stock Option Scheme;
the appraisal process for determining the eligibility of employees to the Employees Stock Option Scheme;
the requirements of vesting and period of vesting;
the maximum period within which the options shall be vested;
the exercise price or the formula for arriving at the same;
the exercise period and the process of exercise;
the Lock-in period, if any ;
the maximum number of options to be granted per employee and in aggregate;
the method which the company shall use to value its options;
the conditions under which option vested in employees may lapse e.g. in case of termination of employment for misconduct;
the specified time period within which the employee shall exercise the vested options in the event of a proposed termination of employment or resignation of an employee; and
a statement to the effect that the company shall comply with the applicable accounting standards.
5. Approve the ESOP Scheme by passing a special resolution (ordinary resolution in case of Private Company). The approval of shareholders by way of the separate resolution shall be obtained by the company in case of-
Grant of an option to employees of subsidiary or holding company; or
Grant of an option to identified employees, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of an option.
6. File form MGT-14 to submit the special resolution within 30 days of passing the resolution.
7. After approval of ESOP scheme by the shareholders, grant options to the eligible employees.
8. Vesting of Options. There shall be a minimum period of one year between the grant of options and vesting of an option.
9. The exercise of Options by the employees;
10. Allotment of Shares. As and when options are exercised file form PAS-3 (Return of Allotment) with ROC.
11. The company shall maintain a Register of Employee Stock Options in form SH-6 and shall forthwith enter therein the particulars of an option granted.
12. The Board of directors, shall, inter alia, disclose in the Directors’ Report for the year, the following details of the Employees Stock Option Scheme:
options granted, vested and exercised;
the total number of shares arising as a result of an exercise of option;
the exercise price;
variation of terms of options;
money realized by exercise of options;
total number of options in force;
employee wise details of options granted to;-
key managerial personnel;
any other employee who receives a grant of options in any one year of option amounting to five percent or more of options granted during that year.
identified employees who were granted option, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant.
IT industry was the first to use this ESOP feature in India. Now, almost all the sectors are using this to attract and retain best talents of the industry. Nowadays, Startup companies are actively using ESOP for attracting best human resources and to stop brain drain. Many startups fail just because of non-availability of qualified and experienced employees because startup companies can’t afford to pay higher packages to them like MNCs offer. The only option for startups to retain and attract them is to use ESOP so that employees can feel ownership rights and help a startup to grow and foster.
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