Employee Stock Option Plan
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Employee Stock Option Plan

WHAT IS ESOP?
Employee Stock option Plan (ESOP) are often defined as Employee Benefit Plan, designed for the long-term benefits of the workers of the Organization by providing them with an choice to participate within the equity ownership of the Organization by paying minimal amount of consideration.

WHY ESOP?
Employees are the core strength of the Business. Retaining an honest employee is as important as hiring one. ESOP is taken into account together of the foremost comprehensive and attractive tools for employee reward and retention. Through the method of ESOP, the workers are given a stake within the ownership of the corporate , which ends up in boosting employee morale and loyalty towards the organization.

MODE OF ISSUANCE OF ESOP:
As per Companies Act 2013, there are two modes of issuing ESOPS: Direct Route and Trust Route:

Direct Route: just in case of direct route, the corporate grants the choices to the workers directly. At the time of exercise, fresh equity issuance is allotted to the eligible employees that make them the shareholders of the corporate .

Procedure under Direct Route:

  • Prepare an ESOP Scheme.
  • Approval of the Scheme by the Remuneration Committee, if any
  • Convene a committee meeting to approve the scheme.
  • Convene the shareholders‟ meeting for approving the scheme. The notice to the shareholders meeting shall give out details with reference to the scheme.
  • Grant the Letter of Offer to the Eligible Employees for issue of Options.Trust Route: The Trust Route is essentially preferred by listed entities. within the trust route structures, the corporate creates a trust specifically for the aim of running the ESOP schemes. Where the workers plan to exercise the choice to accumulate the shares, the trust would first acquire the shares from the corporate or Secondary market and therefore the transfer the shares within the name of the workers .

    These employee welfare trusts are funded by the corporate to accumulate the shares within the secondary market to be transferred to the workers upon exercise of the choices . When the workers leave the corporate , the workers have the choice of selling back the shares to the trust or within the secondary market.

    The Companies Act, 2013 facilitates the corporate to form provisions of cash involving purchase or subscription of its own shares for the aim of issuing Employee Stock Options, subject to certain regulatory conditions, such as:

  • The scheme of provision of cash shall be separately gone by special resolution during a general meeting
  • In case of listed Company, the Trust shall purchase the shares from the secondary market.
  • In case of unlisted Company, valuation of the shares purchased by the trust shall be done by an Independent Registered valuer.
  • The total value of shares within the trust shall not exceed 5%. of the mixture of paid up capital and free reserves of the corporate .Procedure under Trust Route:
  • Prepare and Approve an ESOP Scheme. Grant Letter of Offer to Eligible Employees.
  • Prepare a deed of trust under the Indian Trusts Act and Register an equivalent with the jurisdictional Sub-Registrar.
  • Obtain PAN for the Trust and Open checking account
  • Determine the worth of the shares required to be allotted to the Trust for subsequent transfer to the workers .
  • Obtain Valuation Report from a Registered Valuer for the worth of the Shares.
  • Provide Loan from the corporate to the Trust to enable purchase of the specified number of Shares at the pre-determined price.
  • Allotment of Shares to the Trust
  • Transfer/Sale to Shares from the Trust to the eligible employees respectively at the Exercise Price as determined in accordance with the ESOP Scheme
  • On receipt of Exercise Price, repayment of Loan from the Trust to the corporate