Employ stock ownership or employee share ownership plan is where the employees of the company own shares of that company. The employee’s of the company acquires shares of the company through the Employee Stock Option Plan (ESOP).
An ESOP is a flexible enough plan that is designed to benefit the employee and to motivate them through equity ownership. It enhances productivity and increases profitability to create a market for the stock. It benefits both the company and its employees.
Companies grant ESOPs to their employee’s to buy a specific number of shares at a particular price after a number of years. Companies often use the Employee Stock Option Plan to attract and retain high-quality employees.
Who can issue ESOP?
- Unlisted companies.
- Unlisted Public companies.
- Listed companies.
To whom can ESOP be issued?
A permanent employee who has been working in India or outside India for the company.
Director of the company, whether he is a permanent director or not but excluding an independent director.
But cannot be issued to-
An employee who is a promoter or a person belonging to the promoter group.
A Director who directly or indirectly through relatives, or anybody corporate holds more than 10% of the shares of the company.
PROCEDURE-
- Draft the ESOP scheme.
- Send notice to the directors regarding the agenda to convene the board meeting at least 10 days before the meeting to be held in compliance with the secretarial standards.
- The general meeting shall approve the scheme by shareholders. The following disclosure should be made in the meeting-
A total number of stock options that have to be granted.
Identification of classes of employees participating in the Employee Stock Option Plan(ESOP).
Requirements and period of vesting.
Maximum period within which the options will be vested.
The exercise period.
The maximum number of options to be granted per employee.
The method that will be used by the company to value its options.
The specified time period within which the employee shall exercise the vested options.
A statement regarding the company that the company shall comply with the applicable accounting standards.
- The company shall send notice to the members to convene Extra-Ordinary General Meeting(EOGM) at least 21 days before the meeting to be held in compliance with the Secretarial Standards. The notice shall contain an explanatory statement regarding the disclosures and information.
- The Extra Ordinary General Meeting(EOGM) convene to pass a special or ordinary resolution to take shareholders’ approval with respect to the issuance of ESOP.
- File Form MGT-14 to submit the special resolution within 30 days of passing of the special or ordinary resolution.
- When the options are exercised by the employee’s file Form PAS-3 with ROC. Attach a list of allottees stating their name, address, occupation, and a number of securities allotted to each allottee and then certify the list by the authorized signatory.
- The company shall maintain a Register of Employee Stock Options in Form SH-6.
Some more important points-
There shall be a minimum period of one year between the grant of options and vesting of options.
The employees shall not have any option to enjoy the benefits of a shareholder until the shares are issued on the exercise of an option.
The options that are granted to the employees shall not be transferable.
No person other than the employee shall be entitled to exercise the option.