Employee stock ownership plan (ESOP) is known as the stock options provided to employees of the company and the ownership interest in the organisation. Majorly, it is given by start-up companies that are in their early stage having a limited financial operation or are short of cash. It is right given to employees to obtain the company’s shares at the predetermined price.
While the primary rationale behind the commencement of such a plan is employee welfare, it benefits the employers as well.
Why is it so famous?
As we all know, it is a plan in which the businesses having new company registration in India provides its stock options to its employees at discounted or nominal prices. This plan is usually offered to employees in salary packages or bonus plans and so forth and works as an incentive mechanism.
Its definition has been stated in both the companies act, 1956 and 2013, in section 2, clause 15A of the 1956 act, which covers the definition of ESOP and section 62 of the 2013 act incorporates provisions allowing such plan to execute. The SEBI also directs ESOPs. Primarily, it offers two benefits. First, it gives employees compensation for the work they put in. Second, it helps employers retain top-notch employees by providing them such shares in a phased-out manner, making sure such employees stay loyal and stick to the company for the long term.
How does it actually work?
The ESOP scheme generally works as per the two dates; vesting dates and exercise date. After enforcing a lock-in period first, which usually lasts for few months, can employees initiate to realise and exercise their rights.
The vesting dates.
It is a date on which the company opens the option of purchasing the shares to the employee. It can also be referred to as the date on which the employee realises his/her rights to purchase the shares. It has been given to the employee after a certain lock-in period. It is merely an option, no compulsion. The said period can be extended from more than a day to even a month or so. These stock options can also be provided to an employee in a phased-out manner, thereby providing her/him different vesting dates for each of the shares.
For instance, B, an employee, could be given 50 shares in a phased manner, with vesting dates one year apart for 25 shares each.
The exercise dates.
It is the dates on which the employee purchases the shares as the vesting date does not make it compulsory for the employee to purchase the shares instantly, the employee can lapse the option of exercise at the time for reasons such as contextual market price and fair market value of shares could be less than the predetermined price initially offered to them. Purchasing the shares at such time would only cause losses to the employee; that’s why he/she might determine to skip the right to exercise his/her option of purchasing the shares.
Taxability on ESOP.
As perquisites – where they are treated as perquisites, then tax will be deducted at source. This tax will be deducted when the option is exercised after the vesting period, and the shares are sold.
Capital gains – where they can be taxed as capital gains that are crucially the distinction betwixt the sale value and fair market value, from employees who have sold the same shares at a profit.
ESOP for unlisted companies.
The companies act, 2013 and shares capital and debenture rules mention the provisions for allocating ESOP to employees of unlisted companies. Section 62(1)(b) of the 2013 act mentions that a company can create an ESOP scheme only according to special resolution. Rule 12 of the said act rules the process of creating such scheme and protocols to follow for it.
There are specific steps that need to be followed to create an ESOP scheme as given below;
Recognising the employees.
A special resolution to approve the plan.
Compliance and other duties to look after.
ESOP for listed companies.
Understanding an ESOP scheme for the listed company is possible by following the SEBI guidelines that has been been laid down narrowly from that of an unlisted company. The ESOP scheme for the listed company is known as the employee stock purchase scheme (ESPS).
Rule 2 sub-rule 4 of the SEBI guidelines explain the ESPS as a scheme where the company provides shares to its employees as a part of a public issue or otherwise. The company is allowed to do so only when it has been listed.
The distinction betwixt ESOP and ESPS scheme is very marginal, and that too lies in the issue of shares. While ESOP gives employees the right to obtain a company’s shares at a predetermined price without any obligation, ESPS does not give any right to employees. Still, permits company’s employees to buy shares at discounted price at a predetermined rate. Such a discount can be as low as fifteen per cent from the market price of the shares. Under ESPS, shares can be bought from the after-tax money employee receive. Nonetheless, unlike ESOP, which is more of a remunerative technique, ESPS is a scheme wherein the employees
contribute to the plan by accepting deduction in their payroll betwixt the offer date and the purchase date, thereby saving such purchases.
Aspects that ESPS includes under SEBI guidelines.
– Essential action of buying shares.
– Process of issuing such shares.
– Board’s duties and so forth (same as ESOP).
Hence, after the perusal of guidelines and statutes, companies can provide the best suitable scheme to their company.