Legal Guide

ESOP policy: The future of India belongs here

by Mandvi Singh · 3 min read

ESOP policy

A happy working environment is a reason why any company might progress and reach the heights that they have been dreaming of. They have many ways which 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 under which they have issued this is the guidelines for Employee stock option plans. Those companies who are not listed can issue ESOP following the Companies Act 2013.

Laws supporting employee stock option plan in India

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

Other laws that might affect the working of ESOP policy are the Indian contract act, just related legislations 1882 and some income tax and foreign exchange laws have direct impact overhaul ESOP are issued every year.

Although section 77 of the Companies Act 1957 dealing with curbing this activity of providing financial assistance to all the employees in the form of cash. Under this section, no company will grant a loan to purchase its share. To make sure 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.

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, Employee stock option plan can be issued to the following people:

  • An employee stock option plan can be issued to a permanent employee of the company irrespective of the fact he or she is working within the territory of the country or not.
  • Any whole time or part-time director of the company is eligible to avail of such facility. Any independent director to 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. Employee stock option plans can also be availed by employees and directors of 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 modes of his other relatives who own more than 10% of the company share be it equity or preference, directly or indirectly is excluded from gaining advantages of 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 that is given to them not an obligation it is purely based on the will of the employees. 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 at the same time there floated in the market. The only difference is they are given those stocks at a subsidised rate note at a predetermined price. This allows them to avail good discounts from the fair market price and can exploit these conditions to their advantage as to 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 that criteria for achieving restricted stock unit then it is awarded to them.

  • Phantom equity plan

These are stocks that are 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 to action after happening of a certain event.

Conclusion

Employees are regarded as a building block of a company. Companies must invest and employee satisfaction and make sure their ways to enhance the welfare. Employees form a very crucial score of 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.

Mandvi Singh

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Mandvi Singh

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