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Employee Stock Option Scheme (ESOP)

Courtesy/By: Prathamesh R. Gothe | 2021-02-28 21:30     Views : 117

Employees are the most important part of any organization. They are the reason, that helps even the biggest of the companies to operate smoothly. The workforce of any company is broadly divided from lower to top-level management. The more encouragement provided to the employees by their superiors or the top management of the company, the more they perform at their workplace with greater efficiency for the company. Such encouragement can either be through verbal words or by granting a raise in their paychecks. A monetary form of encouragement, makes them feel more important and adds value to their company.  

Similarly, one more facility provided to employees who make vital contributions to the company’s growth especially from the top management is the Employee Stock Option.

We shall further understand what are ESOPs, the legal provisions that have to be complied with by the company issuing ESOP, and the difference between ESOP and sweat equity shares.


What are ESOPs?

It is an option given by a company to its employees, officers, or directors conferring them with the right to purchase or subscribe to a company’s shares on a future date at a pre-decided price.

A company may also provide this option to the employees, officers, and directors of its holding or subsidiary companies (e.g An employee working at Tata Motors can also be provided with the ESOPs of Tata Steel).


ESOP- The applicable legal provisions

For issuing ESOPs, a listed company shall comply with SEBI’s ESOP Guidelines. On the other hand, an unlisted public company shall satisfy the following conditions for issuing ESOPs to its employees.

1) The shareholders of the company shall approve the issue of ESOPs by a company by passing a special resolution to that effect.

2) In the context of ESOPs, an employee shall be understood as follows:

- A permanent employee whether he is working in India or abroad OR

- A company’s director being a whole-time director or any other director. This shall exclude an independent director. In other words, a company shall not issue ESOPs to the independent directors on its Board.

- The term ‘employee’ as aforesaid shall also include the employees of an issuer company’s holding or subsidiary company.

Employees shall not include such an employee who is the company’s promoter or belongs to its promoter group or a director who already holds more than 10% of the company’s paid-up share capital. This rule shall not be applicable to a startup company for the first 10 years from the date of its incorporation.

3) The explanatory statement attached to the notice of the company’s meeting where the issue of ESOPs is presented for shareholders’ approval shall include details such as the number of ESOPs to be granted under the scheme, the class of employees to whom such an option is made available, the price on the basis of which such options shall be exercised and the way of its computation, the lock-in period levied on such options, etc.

4) If any of the Accounting Standards provide for the computation of the exercise price of the ESOPs to be issued, then the same shall be complied with by the company.

5) In case the ESOPs are to be issued to the employees of the holding company or subsidiary company of the issuer company or if certain employees are to be granted ESOPs amounting to 1% of the company’s issued capital then a separate resolution shall be passed by the shareholders approving the same.

6) If the terms of the issue of ESOPs are to be varied then a special resolution to that effect shall be passed. Such variation shall not cause prejudice to the interest of the option holders in any way.

7) A minimum time gap of 1 year shall be there between the grant of the option and vesting of the option.

8) A company shall have the freedom to impose a lock-in period on the ESOPs issued by it.

9) No employee holding ESOPs shall have the right to claim dividends or possess voting rights till the options are exercised by him and such options are converted into the shares of the company.

10) Options granted to an employee shall not be transferable to any other person.

11) The disclosures shall be made by the Board of Directors regarding the ESOP scheme in its Boards Report.

12) Every company coming up with an issue of ESOPs maintain a register for the same in the prescribed form and shall comply with all the other rules as prescribed under the Companies Act of 2013.  


This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.

Courtesy/By: Prathamesh R. Gothe | 2021-02-28 21:30

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