What is ESOP Meaning in Company?

November 05, 2024

Registrationwala

ESOP full form is Employee Stock Ownership Plan. It is a company’s plan through which employees get a chance to own part of the company they work for. The meaning of ESOP has been defined under the Companies Act 2013. Let’s understand what is an ESOP in this article.

What is ESOPs?

ESOP means Employee Stock Ownership Plan. Under an ESOP plan, a company’s employer offers his employees the company’s stock at a low price or at no additional cost. The stock can be encashed after a specified period at a specific price.

ESOPs in India are governed by the Companies Act, 2013 and relevant SEBI regulations, including SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

“Employees’ stock option” has been defined under Section 2(37) of the Companies Act 2013. According to it, it means the option given to the directors, officers or employees of a company which enables such directors, officers or employees the benefit or right to purchase or subscribe to the shares of the company at a predetermined price.

The issuance of shares to employees under ESOPs is governed by Section 62 of the Act. The section includes the rules for pricing, administration, and issuance.

How does an ESOP work?

An ESOP is granted by a company to its employees for purchasing a specified number of the organization’s shares at a fixed price after the option period (a certain number of years).

An employee needs to go through the pre-defined vesting period before they can exercise their option. The period implies that the employee must work for the company until a part or the entire stock options can be exercised by them.

ESOPs can be used by employees to buy company stocks at allowed prices which are lower than the market value. Shares purchased through ESOPs of company can be sold by employees and they can profit from their investments. In case an employee decides to leave or retires before the vesting term, the ESOP of company must be purchased back by the company at fair market value within a period of 60 days.

Eligibility for ESOPs

An ESOP of company can be granted to the following:

Full-time employees
Directors, excluding independent directors
Officers of the company
Employees of subsidiary, holding, or associate companies

ESOPs can not be granted to following categories of persons:

An independent director
A promoter who is also an employee
Employees who belong to the promoter group
A director who directly holds more than 10% of the shares of the company.

Legal provisions to grant ESOPs to the employees

Here are the legal provisions for granting ESOPs to the employees:

The ESOP scheme must be approved by the shareholders of the company by a special resolution.
If a company wants to issue shares under ESOP scheme which would be more than 1% of the issued share capital of the company then the private limited company or public limited company must take the approval of the shareholders through a separate resolution.
ESOPs granted to employees are non-transferable.
The board of directors must disclose the information about the ESOP in the director report.
Maintain a register of ESOP as per format of form no. SH.6

Benefits of ESOP

There are many ESOP benefits. Some of them are stated below:

ESOP offers flexibility as the shareholders have the option to withdraw funds slowly over time. They can also just sell a portion of the company shares they have.
No employee information is shared through ESOP. Thus, the data of members remains confidential and safe.
ESOPs are a great choice for planning retirement as the employees can avail funds for leading a comfortable life post retirement.
Companies that offer ESOPs to their employees are likely to see a decrease in employee turnover, which can lead to improved job security and retention.

Conclusion

An ESOP (Employee Stock Ownership Plan) allows a company to offer its shares to the employees at no additional cost or a lower price than market value. The employees can encash their stock after a specified time period at a specific rate. When a company offers ESOP, it encourages its employees to give their best. This is because the company’s success translates into financial rewards.

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