Employee Stock Option Plan
It is an employee benefits scheme under which the company encourages the employees to acquire ownership in the form of shares at a predetermined rate. Usually, companies issue ESOP to employees to make them stay with their organization for a long time. It motivates the employees to perform better and offer their loyalty to the company.
Sec 2(37) of Companies Act, 2013 defines “employees stock option” read with Sec 62(1)(b) of Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. This Rule specifies that on complying certain terms and conditions only the unlisted company can offer shares to its employee’s under ESOP.
Suppose an employee receives 400 shares. On completion of every 1 year, 100 shares will be vested. The valuation of the shares increases with the valuation of the company. This also keeps a check on the attrition rate.
Why should we use ESOP?
- ESOPs are a tax-favored strategy that delivers fair value for shareholders.
- Employee Stock Option Plan allows for a “low and slow” ownership transition.
- ESOPs benefit the people who play a constructive role and remain in the company for a long time
- It creates tax-favored independent and sustainable companies.
- The Employee Stock Option Plan creates and preserves a legacy.
Who is eligible for ESOP?
According to the IRS (Indian Revenue Service), the maximum age an employer can impose to be eligible for an ESOP is 21. Moreover, he/she must be eligible for ESOP in the year of joining the company. An employer can restrict eligibility to employees with two years of service but only if the plan has immediate vesting.
Benefits of Employee Stock Option Plan
- Attract Top Talent- You may not be able to match their current salary, but an offer of shares in your company will be enough to attract the best talent.
- Build Motivation- The better your business performs, the better your most talented employees will get paid. There’s no better way to motivate them.
- Keep Them Longer- The employees to whom shares have been allocated are almost certain to complete the four to five years you have defined as vesting period.
Checklist/ requirement for Employee Stock Option Plan
- Check the articles for any specific provision on the issue of share under ESOP.
- The date and members of the compensation committee should be included in the board meeting.
- Notice of general meeting including the number of ESOP to be granted.
- Likewise, hold a general meeting for approval of shareholders by way of ordinary resolution. Additionally, include the authorization for the issue of shares under ESOP and the formation of the compensation committee.
- There must be a compensation committee (CC). The CC shall be a committee of board directors consisting of a majority of independent directors.
- Approval of shareholders by separate resolution.
- The requirement of a draft copy of certificates.
- Filing of Form-PAS-3.
- Disclosure in Director Report (DR).
- Maintenance of register of ESOP in SH-6 at the registered office of the company or such other place as the board may decide.
- Entities in the register shall be authenticated by CS or any other person authorized by the board.
Documents required for Employee Stock Option Plan
- Minutes of a board meeting.
- Special resolution approving ESOP along with the explanatory statement.
- Minutes of the general meeting.
- Boards report.
- Register of employee’s stock option plan.
- PAS- 3, MGT- 14.
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