a plan through which a company awards Stock Options to the employees based on their performance. Under an ESOP, the employees have right to buy the shares of the company on a predetermined date at a predetermined price. The objective of ESOP is to motivate the employees to perform better and improve shareholders' value. Apart from giving financial gains to the employees, ESOP also creates a sense of belonging and ownership amongst the employees.
The Securities and Exchange Board of India (Employee stock option Plan and Employee Share Purchase Plan) guidelines, 1999 have been issued to guide the listed entities for the purpose of accounting for employee stock options. The unlisted entities, on the other hand, have an option to follow the SEBI guidelines or the guidance note on ‘Employee Share Based payments’ issued by the Institute of Chartered Accountants of India.
In the case of every company that has passed a resolution for an Employee Stock Option scheme, the Board of Directors shall at each annual general meeting place before the members a certificate from the auditors of the company that the scheme has been implemented in accordance with these guidelines and in accordance with the resolution of the company in general meeting.
The Scheme would be administered under the superintendence and direction of a Compensation Committee of the Board of Directors. The Compensation Committee shall consist of a majority of independent directors.