Employees Stock Option Simplified

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Below is brief about ESOP, Process and Steps needed for implement

 

ESOP are very useful for companies at the growing stage to attract good employees. The basic purpose of ESOP for many companies is to provide employee benefits or incentives as they believe that by increased employee participation with them perceiving themselves as owners and more involved with the company, it will lead to a positive increase in their dedication to the company, improve work effort, reduce turnover and generally bring a more harmonious atmosphere to the company. All these in turn lead to improved profitability and a win – win situation for all concerned.

 

ESOP can be given to Employee which shall include: a permanent employee of the company who has been working in India or outside India; or a director of the company, whether a whole time director or not but excluding an independent director.

 

METHODS FOR IMPLEMENTING ESOP

  1. ESOP Through Direct Route
  2. ESOP Through Trust Route

 

ESOP THROUGH DIRECT ROUTE

In case of direct route, the company grants the option and at the time of exercise, fresh equity issuance is undertaken to allocate equity to the eligible employees. In case the employee decides to exercise the option, the employee also becomes the shareholder of the company.

 

Direct route is preferred by unlisted companies. The only issue with direct route structures is as and when the employee intends to monetize the shares, the company may have to buy-back the shares, specifically so in case of private limited companies or wait for the company to go for a public offering to get an exit from the company (as a shareholder). Direct route is preferred by unlisted companies. The only issue with direct route structures is as and when the employee intends to monetize the shares, the company may have to buy-back the shares, specifically so in case of private limited companies or wait for the company to go for a public offering to get an exit from the company (as a shareholder).

 

Steps Involved

  • Draft ESOP Scheme
  • Conduct Board Meeting approve ESOP Scheme by passing board resolution
  • Drafting notice and agenda for general meeting with explanatory statement and Call General Meeting and approve Scheme by passing Special Resolution.
  • Filing with MCA
  • Granting of Option
  • Vesting of Option
  • Allotment of shares when option is exercised

 

ESOP THROUGH TRUST ROUTE

Trust Route is the method of issuing shares pursuant to an ESOP scheme. In this method, a Trust is specifically created and registered for the purpose of implementing ESOP Plan. A company drafts a scheme and gets it approved from the members of the company. Simultaneously, a Trust is formed and registered to act as an intermediary between the company and employees. As and when options are exercised by the option holders, Trust is responsible for issuing shares to employees. In this structure, trust is formed and funded by the company itself. The capital of the trust and further funding requirements are fulfilled by the company by way of loan. The funds are then utilized by the trust to acquire shares either by subscribing to the issue of shares by the co. or from the secondary market. Generally, it is observed that shares are transferred by the promoters of the company. Further, as and when options are exercised by the employees, shares are transferred to them in conformity of the ESOP Scheme.

 

Steps Involved

  • Draft ESOP Scheme
  • Conduct Board Meeting approve ESOP Scheme by passing board resolution
  • Drafting notice and agenda for general meeting with explanatory statement and Call General Meeting and approve Scheme by passing Special Resolution.
  • Filing with MCA
  • Formation of Trust
  • Transfer of Shares of the Company in the name of Trust
  • Granting of Option
  • Vesting of Option
  • Transfer of shares by trust to option holder option is exercised

 

Conclusion

 

Simplified Procedure for Issuing ESOP is direct method for unlisted and private limited Companies. Trust route is suggested for Listed Companies only because in case of trust route there are many limitations & further compliance on the part of Company:

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