ESOPs – The Legal Procedures & Implementation under the Companies Act & SEBI

[2022] 138 taxmann.com 276 (Article)

Background

Companies often resort to introducing employee rewards through Employee Stock Option Scheme for company’s long-term growth and shareholder value creation and also to attract, retain and motivate the best available talent. In other words, it is a mechanism by which employees are compensated with increasing equity interests over time. Employee Stock Option Plan (ESOP) is an option to its employees to acquire Equity Shares of the company at a future date and at a pre-determined price. There is no limit on the quantum of ESOPs to be issued to employees.

Various modes of ESOP Plan

The various modes through which a ESOP plan can be implemented is through (a)ESOP (b) Employee Stock Purchase Plan (ESPP) (c) Stock Appreciation Rights-cash (SAR) (d)Stock Appreciation Rights -Equity (e) Restricted Stock Unit (RSU).

ESOP: It is a right offered by a company to its employees to take equity shares of a company at discounted price.

ESPP: It allows Employees to purchase the company’s shares, often at a discount from Fair Market Value.

RSU: Employee is awarded with the shares subject to fulfilment of certain underlying conditions. The conditions may be for e.g. Target or revenue and performance based.

SAR: In this Scheme, the employee gets the benefit in the form of cash /equity which is the difference between the date of grant and final exercise of options.

Terms under ESOP

Grant: Offering and grant of ESOP Options from the corporate entity to Employees.

Vesting: Vesting is a process through which employee becomes eligible to exercise options.

Exercise: Exercise is nothing but when an employee applies to the Company for getting the shares allotted.

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