An Employee Stock Ownership Plan (ESOP) is a program that allows employees to become owners of the company by providing them with the opportunity to purchase shares. This benefits both the company and the shareholders. By offering employees the chance to own shares, the company can retain them for a longer period.
ESOPs are commonly used in Private Limited Companies as a strategic planning tool. They enable employees to acquire shares in the company, aligning their interests with the company’s success and share price appreciation. This is seen as a way to motivate employees to work in the best interest of the company.
Under an ESOP, employees are typically offered shares at a discounted price. The company determines the number of shares to be allocated to each employee and the proportion of shares to be offered based on their years of service.
Upon vesting, if an employee chooses to leave the company due to resignation or retirement, the company may buy back the shares from the employee. The payment for the repurchased shares can be made in a lump sum or through regular installments, depending on the specific plan.
Advantages of ESOP Compliance:
- Opportunity for Profit: Employees have the advantage of acquiring company shares at a low cost and selling them later for a profit after a specific period of time set by the employer.
- Cash Flow Savings: By using ESOPs as an incentive, organizations can reduce cash compensation expenses, as employees receive shares instead of immediate cash payments. This helps in managing immediate cash outflows.
- Employee Motivation: ESOPs make employees owners of the company, which can serve as a strong motivator. When employees have a stake in the company’s success, they are more likely to give their best effort and be committed to the company’s growth.
- Talent Attraction and Retention: Even if a company may not be able to offer high salaries, providing shares in the company can attract top talent. By offering employees ownership opportunities, companies can retain skilled individuals for a longer period of time.
Overall, ESOP compliance offers a range of benefits, including financial rewards, cost savings, employee motivation, and talent retention.
Process of ESOP Compliance
- Obtain Board Approval: The first step is to hold a board meeting to gain approval for the ESOP (Employee Stock Ownership Plan).
- Shareholders’ Approval: After obtaining board approval, a shareholders’ meeting should be conducted to seek their approval for the ESOP.
- Establish ESOP Compensation Committee: Form a dedicated committee responsible for managing the ESOP and its related matters.
- File Form-PAS-3: Complete the necessary paperwork and file Form-PAS-3 with the relevant authorities to ensure compliance with regulatory requirements.
These steps ensure the proper establishment and compliance of an ESOP within the organization.
Key Deliverables
- ESOP Plan Document
- ESOP Trust
- Employee Communications
- ESOP Agreement
- Compliance Documentation
- Employee Statements
What do you want to know?
After the option period, an organization grants ESOPs to its workers in exchange for purchasing a predetermined number of shares of the firm at a specified price (a certain number of years). Before an employee may exercise his option, he must first go through the pre-defined vesting period, which means the employee must work for the company until a portion or all of his stock options can be exercised.
The term Permanent Employee has not been explained in the enabling legal provisions of ESOP nor has it been defined under the Companies Act per se. Considering the practical aspects, in case of both Listed and Unlisted Companies, an employee who has satisfactorily completed the probation period can be considered to be a Permanent Employee.
A Startup Company, as recognized by the Department for Promotion of Industry and Internal Trade (DPIIT), is exempted from the restriction of participation in an Employee Stock Plan of the promoters (founders) and directors, holding more than 10% of the capital, for a period ten (10) years from the date of its incorporation or registration with the DPIIT.
Yes. A Private Company can grant ESOPs to its permanent employee, who is also a shareholder of the Company Further, a Director cannot be made allotment of shares pursuant to ESOPs if he is holding (directly or indirectly along with his relatives) beyond 10% of the paid up capital of the Company.
Yes. The scheme can cover both existing and future employees of the company who join after the approval of the scheme.
Yes. A Step down subsidiary is also a subsidiary to the extent permissible by law and an Indian Company can grant ESOPs to employees of its Subsidiary Company, in India or outside India.
ESOPs can be granted only to permanent employees who are on the payroll of the company. Since a consultant as full time Professionals is not on the payrolls of the company, they are not eligible for ESOPs.