ESOP Policy: Building a Brighter Future for India’s Workforce

by  Adv. Anamika Chauhan  

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ESOP policy

A happy working environment is a reason why any company might progress and reach the heights that they have been dreaming of. Many ways have been devised to provide incentives and enhance employee belongingness. One of these successful methods is the employee stock option plan. It can be regarded as a benefit plan to encourage employee ownership and reward them for the hard work they have put into the company.

Under the employee stock option plan, you can have company shares floated to all the employees at a much-discounted rate. All the listed companies can issue employee stock option plans following the Securities and Exchange Board of India, which has issued the guidelines for Employee stock option plans. Those companies that are not listed can issue ESOP following the Companies Act 2013.

People Also Read: Why do Companies Offer ESOPs?

Laws supporting employee stock option plan in India

Section 2 Clause 37 of The Companies Act 2013 allows all directors, officers, and employees of companies to purchase the company’s shares at a subsidised rate on any future date before floating them to the general public. This law supports employees because it not only increases employee satisfaction but also enhances future start-ups.

Other laws that might affect the workings of ESOP policy are the Indian Contract Act, related legislation 1882, and some income tax and foreign exchange laws, which have a direct impact on the overhaul of ESOPs issued every year.

Section 77 of the Companies Act 1957 deals with curbing this activity of providing financial assistance to all employees in the form of cash. Under this section, no company will grant a loan to purchase its share. To ensure this section is followed to its core and employee welfare is also taken into consideration, companies are promoted to issue Company shares at a subsidised rate, which is a cashless manner of providing incentives to their employees.

People Also Read: Understanding ESOP Valuation for Businesses and Employees

Who are the parties in a company that can avail of the benefits of an employee stock option plan?

According to section 12 clause one of the Company’s share capital and debenture rule 2014, an Employee stock option plan can be issued to the following people:

  • An employee stock option plan can be issued to a company permanent employee regardless of whether he or she is working within the country’s territory.
  • Any whole time or part-time director of the company is eligible to avail of such facility. Any independent director of the company is excluded from the employee stock option plan
  • Employee or director of any subsidiary company whose office is in India or outside India. Employees and directors can also avail themselves of employee stock option plans from a holding company or an associate company.

Parties who are not eligible to avail of employee stock option plan facilities

  • Any director of a company who himself or through the means of his other relatives owns more than 10% of the company share, be it equity or preference, directly or indirectly, is excluded from gaining the advantages of an employee stock option plan.
  • Any promoter group of all employees working in that area is excluded from the employee stock option plan.

Types of employee stock option plans

Five main types come under ESOPS policy in India and they are:

  • Employee stock option scheme

Under this head, employees are offered a plan to buy shares of the company at a predetermined price. It is an option, not an obligation, purely based on the employees’ will. The basic requirement to avail of such a facility is to be a permanent employee of the company for a specified time.

  • Employee stock purchase plan

Under this head, employees are granted company stock, and at the same time, they float in the market. The only difference is that they are given those stocks at a subsidised rate note at a predetermined price. This allows them to avail themselves of good discounts from the fair market price and can exploit these conditions to their advantage at their will.

  • Restricted stock award

It is the type of reward that is given to any employee for being in an outstanding position in the company or for completing any particular task. These talks are set to be issued from the day on which they are awarded to the employee. The condition under this also includes permanent employee employment for our specified period and has made an outstanding achievement in a specified field. If he or she is meeting the criteria for achieving restricted stock units then it is awarded to them.

  • Phantom equity plan

These are stocks allotted to employees at a predetermined price. This strike price is not taken as a price but is recorded as a grant for fulfilling any condition. It is a contingency-related stop that only comes into action after a certain event occurs.

People also read: Tax Advantages for Shareholders Selling through ESOPs

Conclusion

Employees are regarded as a company’s building block. Companies must invest in employee satisfaction and ensure that their ways enhance employee welfare.

Employees form a very crucial score for any business establishment, so gaining their loyalty with the mode of employees’ stock option plan will not only ensure their future is secured but will also make sure many starters are promoted in the country. For any future commercial objectives, an employee stock options policy is the key.

Your company's ESOP policy helps you attract the best talent. Take help of a lawyer to draft an ESOP policy in just a few days.

Adv. Anamika Chauhan

Adv. Anamika Chauhan

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Advocate Anamika Chauhan has been practising law independently for the last 5 years, during which she has gained extensive experience in handling cases. She offers legal consultancy and advisory services with a focus on achieving ethical and professional results. In addition, her excellent communication skills allow her to articulate arguments persuasively in both written and verbal forms.

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