The employee Stock Option Plan (ESOP) is also known as Employee Stock Ownership Plan. It is a system through which employees are allowed by companies to buy the latter’s shares. In other words, the company’s employees are given the right to acquire their employer’s shares. In some cases, a foreign holding/subsidiary company offers such options to the Indian subsidiary/holding company’s employees.
In ESOP, employees are given rights (stock options). They get the company’s shares for free or at discounted rates, at a predetermined price or the cost to be determined on the prefixed method, compared to the potential market cost.
Usually, startups provide ESOPs to their employees, as the remuneration they offer isn’t as lucrative. But otherwise as well, providing ESOPs is a way to win the employee’s vested interest in the company. As shareholders, employees work more responsibly towards the company’s progress. The more the company grows commercially, the more they earn!
In some cases, employees provide ESOPs exercised on a future date. It refers to an incentive for a long-term commitment from the employee to the company.
How do companies issue ESOPs? Let’s find it out.
Section 62(1)(b) of the Companies Act, 2013, and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 (“Rules”) governs ESOP issuance. ESOP issuance procedure under the Rules is similar to that under the Securities and Exchange Board of India Employee Stock Option Scheme Guidelines for listed companies. So, here’s how ESOPs are issued.
If you are a private company that wants to issue shares under ESOP, you must ensure that you are authorized by the Articles of Association (AoA) to do.
Suppose you aren’t; you must first conduct an extraordinary general meeting to alter the AoA to include the provisions of share issuance through ESOP.
Then, you can proceed with holding the board meeting to pass the resolution and receive ESOP scheme approval from the shareholders.
Of course, there is more to ESOPs. But you must know it from experts. We hope these insights help you get a basic understanding, though.
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7, Saraswati Heights,Behind Goodluck Cafe, Deccan Gymkhana, Pune -411004
Phone : +91-7722063311
Email : ang@angca.com
Tulasi Green, Office 1, B/H- D-Mart, Baner Road, Nandan Prospera Rd, Laxman Nagar, Baner, Pune, Maharashtra 411045
Phone : +91-9420442921
Email : ang@angca.com
A.N GAWADE & CO LLP
5B, Maker Bhavan, No 2, 5th Floor,S V Thackersy Marg,New Marine Lines,
Mumbai-400020.
Mobile : +91-8983424134
Email : ang@angca.com
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