Employee Stock Option Plan (ESOP) is an option given to directors, officers or permanent employees of a company to purchase or subscribe the securities offered by the company at a future date, at a concessional price generally.
Employee Stock Option Plans are one of the most important tools to attract, encourage and retain employees. It is the mechanism by which employees are compensated with increasing equity interests over time.
Under Section 62 (1) (b) of the Companies Act 2013, where at any time a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares may be offered to employees under a scheme of employees’ stock option, subject to a special resolution passed by the company and subject to such conditions as may be prescribed.
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Why ESOPs Are Issued by the Companies
- Link personal wealth creation to organizational creation
- Attract, reward, motivate and retain talent at the start-up/growth stage
- Deferred compensation strategy
- Good retirement benefit plan
- Reduction in cash costs – market pays not the Company
- Can be especially important for start-up Companies that are cash starved
- Promote employee ownership culture
- Helpful tool in cash crunch – In case of economic slow-down where companies are low on cash, they can motivate employees by offering ESOPs.
What Company sees while granting ESOPs to employees
- Loyalty, Performance and Designation
- Present and Potential Contribution
- Opportunity Cost
- ESOPs can be implemented by direct route or trust route.
- The company granting options to its employees pursuant to ESOPs will have the freedom to determine the exercise price in conformity with the applicable accounting policies, if any.
- There shall be a minimum period of one year between the date of grant of option and the date of vesting of the option.
- As per Accounting Standard AS 20, stock options granted pursuant to an employee share-based payment plan, should not be included in the shares outstanding till the time employees have exercised their right to obtain shares or stock options.
- ESOPs granted to directors become part of managerial remuneration.
- Under the Companies Act 2013, there shall be a minimum period of one year between grant of options and vesting of options, hence the exercise period cannot be less than one year from the date of grant of option.
- There are two methods of accounting for Employee Share Based Payments viz, intrinsic value method or fair value method.
- For accounting purposes, employee share-based payment plans are classified as equity settled, cash settled and plans with cash alternatives.
Procedure for Issue of ESOP by Unlisted Company
Now we are Going to Understand the Procedure for issue of ESOP by Unlisted Company
| Steps | Procedure |
| Step 1 | Draft the ESOP scheme. |
| Step 2 | Convene the Board Meeting and pass the scheme. |
| Step 3 | Call the general meeting to approve the scheme by Shareholders. The following disclosure will be made in the explanatory statement annexed to the notice for passing of the resolution-
(a) the total number of stock options to be granted; (b) identification of classes of employees entitled to participate in the Employees Stock Option Scheme; (c) the appraisal process for determining the eligibility of employees to the Employees Stock Option Scheme; (d) the requirements of vesting and period of vesting; (e) the maximum period within which the options shall be vested; (f) the exercise price or the formula for arriving at the same; (g) the exercise period and process of exercise; (h) the Lock-in period, if any ; (i) the maximum number of options to be granted per employee and in aggregate; (j) the method which the company shall use to value its options; (k) the conditions under which option vested in employees may lapse e.g. in case of termination of employment for misconduct; (l) 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 employee; and (m) a statement to the effect that the company shall comply with the applicable accounting standards. |
| Step 4 | Approve the ESOP Scheme by passing a special resolution (ordinary resolution in case of Private Company). The approval of shareholders by way of separate resolution shall be obtained by the company in case of-
(a) grant of option to employees of subsidiary or holding company; or (b) grant of 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 option. |
| Step 5 | File form MGT-14 to submit the special resolution within 30 days of passing the resolution |
| Step 6 | After approval of ESOP scheme by the shareholders, grant options to the eligible employees. |
| Step 7 | Vesting of Options. There shall be a minimum period of one year between the grant of options and vesting of options. |
| Step 8 | Exercise of Options by the employees |
| Step 9 | Allotment of Shares. As and when options are exercised file form PAS-3 (Return of Allotment) with ROC. |
| Step 10 | The company shall maintain a Register of Employee Stock Options in form SH-6 and shall forthwith enter therein the particulars of option granted. |
| Step 11 | The Board of directors, shall, inter alia, disclose in the Directors’ Report for the year, the following details of the Employees Stock Option Scheme:
(a) options granted; (b) options vested; (c) options exercised; (d) the total number of shares arising as a result of exercise of option; (e) options lapsed; (f) the exercise price; (g) variation of terms of options; (h) money realized by exercise of options; (i) total number of options in force; (j) employee wise details of options granted to;- (i) key managerial personnel; (ii) 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. (iii) 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 |
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