Who Are Eligible To Be Granted Stocks Under ESOP?

6 September 2023

953 5 mins read

Employee Stock Option Plan allows the employees of a company to buy stocks at a given price. Read on to know what is issue of staff equity ownership through ESOP!

Employee Stock Option Plan or ESOP is a type of stock option that gives employees the right to buy company stock at a set price. This option is granted by the company to its employees as part of their compensation package. If your company has recently invited you to take part in this scheme and you are wondering what is issue of staff equity ownership through ESOP is, this article is for you. The primary purpose of ESOP is to encourage the long-term retention of employees. The employees are given the option of receiving staff equity ownership in the company after working there for some time. They need not sell their staff equity ownership immediately as long as they stay with the company for a specified period. In an ESOP, employees are given stock options when they join an organization, and these options vest over time, based on their length of service or tenure with the organization. The value of these options increases with time but can be forfeited if the employee leaves before their vesting period is completed. Many companies across different industries have an ESOP scheme in place. Some companies even offer special incentives and benefits to employees who hold stocks through this program. ESOPs are a win-win situation for both employers and employees. While the employees receive the right to purchase company staff equity ownership at a certain price, the employer gets the opportunity to keep key employees on board without having to pay high salaries.

Table of Contents

Essential Terms of ESOP

There are three crucial terms associated with ESOP:

Granting

This is the process of giving the ESOP option to employees. Typically it is done through a formal written agreement.

Vesting

It is an employee’s right to claim the stocks allotted to them.

Exercising

An employee can exercise their options to buy staff equity ownership at a predetermined price.

How to Issue Stocks Through an ESOP Program: A Step-By-Step Procedure

Firstly, the company should draft a resolution in favor of implementing the ESOP program.
Once the resolution is passed, an application must be submitted to the Regional Director of Companies, along with all relevant documents. The Regional Director will then send the application to the registrar of companies (RoC) within 30 days.
After the RoC receives the application, it will scrutinize the same and approve it if the information provided is correct.

Once the application is approved, the company will publish a notice of the approval in the newspaper. The advertisement should contain the following details, such as the name of the authorised representative who is going to manage the program, how many options will be issued and when they will vest, the number of staff equity ownership to be allotted under each option, and date of commencement of the scheme, i.e., the date on which the employees were allowed to subscribe to the stocks, along with others.

The Advantages of An ESOP Scheme

Long-term Equity

The primary benefit of an ESOP is that it gives employees long-term equity participation in the company. Unlike other forms of compensation, such as cash bonuses or salary increases, ESOPs give employees an excellent opportunity to grow as the company develops and expands. This also encourages them to work harder and perform well.

Long-Term Retention Of Employees

An ESOP helps in retaining employees for an extended period of time. With an employee stock option plan, the employees get a chance to invest in the company they work for and consequently be an important part of their company. If an employee feels valued by the management, then they would be willing to stay with the company longer.

Motivational Aspect

The motive behind having an ESOP scheme is to motivate employees for increased productivity and performance. When employees feel a sense of ownership in the company they work for, they tend to put more effort into their job. More than just a simple financial incentive, an ESOP increases the motivation levels of the employees.

Corporate Growth And Development

Companies often use ESOP schemes to reward their top performers, promote goodwill among the employees, and increase employee morale. In the long run, an ESOP scheme can be extremely beneficial for the growth and development of the company.

Who Are Eligible to Be Granted Stocks Under ESOP?

As per clause 12(1) of Companies (Share Capital and Debentures) Rules, 2014, a company can grant its directors and employees stocks under an approved ESOP scheme. The rule further defines the eligibility of the beneficiaries as follows –

A company can offer its stock to employees who have been employed “permanently” under the ESOP program, regardless of whether they are posted within the country or abroad.
Any full-time or part-time member of the board of directors can also get stocks under the ESOP scheme. However, independent directors are not eligible under this rule.
Permanent employees and full or part-time directors of any associate, subsidiary, or holding company, whether in India or a foreign country, are also allowed to receive staff equity ownership through this option.

However, below are the persons who are not entitled to take part in an ESOP scheme –

If someone is the promoter of the company.
If any director already holds ten percent or more equity stock of the business individually or through any relative or another company.

Please note that these two ineligibility clauses are not applicable for new companies for a ten years period from their foundation date.

Are Staff Equity Ownership Issued Under an ESOP Subject to Taxation?

Since stocks are given as pre-requisites in this scheme, they are taxable per the rules.

The primary purpose of ESOP is to encourage the long-term retention of employees. The employees are given the option of receiving staff equity ownership in the company after working there for some time. They need not sell their staff equity ownership immediately as long as they stay with the company for a specified period.

In an ESOP, employees are given stock options when they join an organization, and these options vest over time, based on their length of service or tenure with the organization. The value of these options increases with time but can be forfeited if the employee leaves before their vesting period is completed.

Many companies across different industries have an ESOP scheme in place. Some companies even offer special incentives and benefits to employees who hold stocks through this program.

ESOPs are a win-win situation for both employers and employees. While the employees receive the right to purchase company staff equity ownership at a certain price, the employer gets the opportunity to keep key employees on board without having to pay high salaries.

Conclusion

An ESOP is a great way for companies to retain their employees, motivate them, and make them feel like they own a stake in the organization. The best part about using an ESOP scheme is that businesses don’t have to shell out a lot of money on recruiting top talent. It is easy to implement and maintain and has a huge impact in terms of employee morale and productivity.If you are also a business who wants to register and provide ESOP plans for your employees, our talented pool of legal experts at Vakilsearch can provide you with all the help you need. If an employee is terminated prior to the vesting period, the entire value of the options is forfeited.

Frequently Asked Questions:

Is There A Lock-In Period For The Stocks Issued Under An ESOP?

Yes, a lock-in period is imposed to ensure that the employee does not dispose of the stocks until the option vests. For example, if an employee is allotted 100 staff equity ownership under an ESOP, and the company sets a lock-in period of more than one year, they cannot sell those staff equity ownership even after a year. Instead, the employee will wait for the specified period of time to complete the payment and exercise the options.