What is ESOP?
ESOP or Employee Stock Option Plan can be defined as a type of employee benefit plan which is given to employees of the company where they could hold stocks or acquire some ownership in the company.
“Employees and Management see ESOP as a reward for their reward and hard work and as an incentive for future growing business”.
– Divya Gupta (Market Analyst, MUDS Management Pvt Ltd)
ESOPs are nothing but a right given to the employees which entitle them to buy shares at a future date and in predetermined manner. The ultimate purpose of ESOPs is to create an ownership attitude in the employees of the company and aligning the interests of the company with that of company.
Types of Option Plans:
Employee Stock Option Scheme (ESOS):
In this particular scheme, an opportunity is given by employer to let you own a certain number of shares at the pre-established price( knowns as Grant Price) at a specified period of time ( known as vesting period).
Employee Stock Purchase Plan (ESPP):
Employees are given a right to acquire shares of the company at the present date but at a price lower than prevailing market price. However, the employee cannot sell the shares for certain number or has to continue with the company for that period (known as lock-in period)
Stock Appreciation Right (SAR) / Phantom Equity Plan (PEP):
In this particular type of scheme, no shares are allocated to the employee of the company but the employee is given appreciation in value of share as an incentive or performance bonus.
Restricted Stock Award ( RSA):
Under the scheme, an employee receives an award of the stock, subjected to the certain conditions , which if not met the shares are forfeited. The employee is the owner of the date of award along with an entitlement to have voting rights and receive dividends.
Documents necessary to issue ESOPs:
- ESOP Scheme
- ESOP Grant Letter
- Acceptance Letter
- Documents of Board Meeting
- Notice calling extraordinary meeting
- Explanatory statement as per section 103 of the Companies Act, 2013
- Certified true copy of approval of ESOP plan
How ESOPs are taxed?
- At the time of grant and vesting of options: No tax is levied as per as current Indian Tax laws.
- At the time of exercise of options: As per Income Tax law, tax is deducted on perquisite value treating it as a part of salary with same tax rate that is applicable on salary.
- At the time of sale of shares: The tax is calculated on excess of sales price over the FMV of shares on the date of exercise.
“The selection criteria of the option plan for the employees would totally depend on the objective with which ESOP is implemented.”
– Shweta Gupta, Founder, and CEO, MUDS