ESOPs is one of the best ways to incentivise employees, and to retain them for a long period of time. It works as a catalyst for the employees’s growth as well as for the growth of the company. There are other options such as ESPP and SARs which are similar to ESOP. This article also involves the comparison of the various options. It also explains various elements of ESOP, its taxation aspects along with a detailed process to issue ESOP.
INTRODUCTION
An Employee Share Based Payments (ESBPs) is an employee benefit payment that gives employees an ownership interest in the company. Under these plans, the employer gives certain stocks of the company to the employee for negligible or less cost which remain in the ESBP fund, until the options gets vested and the employee exercises them
WHY ESBPs?
This article revolves around the components and taxation aspects of different types of ESBPs. Before we proceed further, let us have a quick understanding about the different types of ESBPs.
TYPES OF ESBPs
CONTENT | ESOPs | ESPPs | SARs |
FULL FORM | Employee Stock Option Plans | Employee Stock Purchase Plans | Stock Appreciation Rights |
MEANING | ESOPs are in form of contracts which give employees a right, but not an obligation, to purchase shares at exercise price. | ESPP is a plan under which the company offers shares to its employees at a discounted price as part of public issue or otherwise | SARs entitle the employees to receive cash or shares for an amount equivalent to the excess of market price on exercise date over a stated price. |
VESTING PERIOD | YES | NA | YES |
EXERCISE OF THE OPTION | If not exercised, then option gets lapsed. | NA | Either exercise in Equity or in Cash. |
SETTLEMENT | Equity Based | Equity Based | Equity / Cash Based |
RECOMMENDATION | -To motivate employees to perform well in coming years
-To retain employees at least until vesting period -Feel of ownership amongst employees |
-To Incentivize Employees for past performance
-Feel of ownership amongst employees |
-One-time Settlement without dilution of Equity
-To retain employees at least until vesting period |
COMPONENTS OF ESOP
GRANT
♦ ESOP POOL:
♦ PERFORMANCE FACTOR:
♦ ESOP TO EMPLOYEES AND DIRECTOR:
VESTING SCHEDULE
EXERCISING SCHEDULE
♦ EXERCISING PERIOD:
OTHER IMPORTANT POINTS:
LOCK-IN PERIOD: The period after allotment of share during which the employees are prevented from selling the shares.
SHARE TRANSFER AFTER LOCK-IN: Management’s permission is required to transfer the shares after Lock-in period.
BUY-BACK: The Company can initiate buy-back process so that the employees can transfer the share to company it-self rather than transferring to third party.
OTHER SHAREHOLDER AGREEMENT: The agreement which was entered into with normal investors has as it is applied for the employees.
TAXATION OF ESOPs
IN THE HANDS OF EMPLOYEE:
IN THE HANDS OF EMPLOYER:
OTHER IMPORTANT POINTS:
TDS: At the time of allotment of shares the ESOPs are implicated as perquisites in the hands of employees, hence accounted as salary and accordingly TDS has to be deducted u/s 192B.
RECENT AMENDMENT: ESOPs given by start-ups to employees are currently taxed as perquisites in the year of allotment; Finance Act, 2020 states deferring of tax payment by employees to 5 years or till they leave the company or when they sell the shares whichever is earlier.
ESOPs BOUGHT BACK BY COMPANY
TAXATION OF ESPPs
IN THE HANDS OF EMPLOYEE:
IN THE HANDS OF EMPLOYER:
TAXATION OF SARs
EQUITY-SETTLED SARs
IN THE HANDS OF EMPLOYEE:
IN THE HANDS OF EMPLOYER:
CASH-SETTLED SARs
IN THE HANDS OF EMPLOYEE:
IN THE HANDS OF EMPLOYER:
NOTE:
About the authors:
CA Shreyans Dedhia, Partner I’d – [email protected]
CA Hardik Patel, Manager I’d – [email protected]
Ashish Raithatha, Consultant I’d – [email protected]