ESOP: (a tool for attracting and retaining high-quality employees.)

An ESOP (Employee stock ownership plan) refers to an employee benefit plan which offers employees an ownership interest in the organization. Employee stock ownership plans are issued as direct stock, profit-sharing plans or bonuses, and the employer has the sole discretion in deciding who could avail of these options.
How ESOPs work?
An organization grants ESOPs to its employees for buying a specified number of shares of the company at a defined price after the option period (a certain number of years). Before an employee could exercise his option, he needs to go through the pre-defined vesting period which implies that the employee has to work for the organization until a part or the entire stock options could be exercised.

Why Company offers ESOPs to their employees? Organizations often use Employee stock ownership plans as a tool for attracting and retaining high-quality employees. Organizations usually distribute the stocks in a phased manner. For instance, a company might grant its employees the stocks at the close of the financial year, thereby offering its employees an incentive for remaining with the organization for receiving that grant.

ESOPs from an employee’s perspective
With ESOPs, an employee gets the benefit of acquiring the shares of the company at the nominal rate, and sell them (after a defined tenure set by his employer) and make a profit. There are several success stories of an employee raking in the riches together with founders of the companies.

Tax Implication of ESOPs
Employee stock ownership plans is considered as perquisites with respect to taxation.. On the other hand, for an employee, ESOPs are taxed at two below-mentioned instances – While exercising – in form of a prerequisite. When an employee exercises his option, the difference between Fair Market Value (FMV) as on date of exercise and the exercise price is taxed as a perquisite. While selling – in the form of capital gain. An employee might sell his shares after buying them. In case he sells these shares at a price higher than FMV on the exercise date, he would be liable for capital gains tax.

Eligibility criteria to be a part of ESOP:
Although each company has its own purpose of issuing ESOP, certain employees are not permitted under the scheme:
• Promoters or the one who belongs to the promoter group
• Any director, either himself or any of his relatives, if he holds more than 10% of the outstanding equity shares under his name.

What are the various option plan available for the Employees?
Although they are many plans available , few prominent ones are :
• ESOS ( Employee Stock Option Scheme)
• ISO(Incentive Stock Option)
• ESP( Employee Stock Purchase)
• SARs(Stock Appreciation Rights)
• RSA( Restricted Stock Award)
• RSU( Restricted Stock Unit)

The selection criteria would depend entirely upon what is object with which ESOP plan is being implemented.
What are the legal compliance to be taken care for implementing of ESOP scheme?

Even the smallest thing in a company has some laws to be followed, same goes for ESOP scheme. The legal compliance to be taken care of while implementation of ESOP scheme are:
• SEBI( ESOP Guidelines)
• Companies Act
• Income Tax Act
• Accounting Guidelines(ICAI,IFRS,US GAAP)
• FEMA

FAQ on ESOP :-

Q 1. Are The Options Valid For Lifetime Or For A Certain Period?
Ans : No, Options are not for lifetime. Either when an employee is terminated or on the expiry of the exercise period, Option lapse depending on the conditions mentioned by the employer. Once an Option is lapsed , it cannot be converted to the shares.

Q 2. Are ESOP Transferable To Any Third Party By The Employee?
Ans : ESOPs are not shares in itself. Therefore, they cannot be transferred but once they are converted to the shares, an employee can freely transfer them subjected to terms and conditions stated by the company.

Q 3. What Would Happen If The Holder Of ESOP Dies Before Vesting Of The Options?
Ans : In case the holder of ESOP dies before lapsing of the option, they vest in his/her legal heir or nominee.

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