Indian Company Master Data Made Simple

ESOP - Employee Stock Option Plan

3 min read

Quick Summary

ESOP is a benefit plan that gives employees the right to purchase company shares at a future date at a predetermined price, incentivizing employee retention and performance.

Employee Stock Option Plan (ESOP) is governed by Section 62(1)(b) of the Companies Act, 2013 and SEBI (Share Based Employee Benefits) Regulations, 2014 (for listed companies). It allows companies to offer equity participation to employees.

Key Terms

  • Grant: Offering options to employees
  • Vesting: Right to exercise options earned over time
  • Exercise: Converting options into shares by paying exercise price
  • Exercise Price: Price at which shares can be purchased
  • Vesting Period: Time before options can be exercised

Process

  1. Board approves ESOP scheme
  2. Shareholder approval through Special Resolution
  3. File MGT-14 within 30 days
  4. Grant options to eligible employees
  5. Employee exercises vested options
  6. Allot shares and file PAS-3

Conditions

  • Special Resolution required
  • One year vesting period minimum
  • Cannot be offered to promoters
  • Lock-in period may be specified
  • Free pricing for unlisted companies

Benefits

  • Employee retention
  • Align employee interests with company
  • Attract talent without high cash salaries
  • Tax benefits for startups

Key Points

  • Employee stock ownership plan
  • Right to buy shares at set price
  • Requires Special Resolution
  • Minimum 1 year vesting
  • File PAS-3 on exercise