2. Esops
Employee Stock Option Plans (ESOP) is about ‘options’. Many companies in
India offer ESOPs to their employees. This basically means that the employee has
the option to purchase stock of the company at a future date at a pre-determined
price.
ESOP’s are a reward to the employee for their performance and also a motivation
to keep increasing their performance. Employees typically have to wait for a
certain duration known as vesting period before they can exercise the right to
purchase the shares.
3. ESOP – Concept
ESOP gives an employee the option to buy a certain number of
shares of the company at a pre-decided price, which usually is a
discounted price. An option is first granted to an employee and after
a specific period (when exercised) vests with the employee. This
period is referred to as the vesting period.
Vesting Period=Date of Vesting options less date of granting options
E.g.: ‘X’ is granted an option on 01-01-2012 with a vesting period of 1
year. It would vest with ‘X’ on 01-01-2013. On vesting and if the option is
exercised, ‘X’ may buy shares against the Option at the pre-determined
price.
4.
5. How ESOP is Routed
Perquisite: At the time of allotment, difference between fair market value
of shares on date of exercise of option and actual exercise price is taxed
perquisite.
Capital Gain: In addition, the difference between the sale consideration of
the shares and the FMV on the date of exercise is chargeable to tax
the head capital gains in the hands of an employee.
6. ESOP regulations under Companies Act
Prior to enchantment of new Companies Act 2013, there were no
regulations specified for ESOP. However Companies Act 2013 has
framework related to ESOP for unlisted Companies. Now Companies
need to comply with the disclosure and other requirements specified in
this regard.
7. Conclusion
In order to retain the human capital, companies in India are investing a lot of money
these days and ESOP has become an important medium to motivate the employee.
Companies offer shares as an employee benefit and as a deferred compensation.
The structure of ESOP plans is largely driven by respective local tax laws and
For increased transparency many countries have introduced or are contemplating
introduction of more stringent regulations. In spite of increased scrutiny, equity plans
still remain a key part of executive remuneration packages and their global spread is
likely to continue.
As attractive ESOPs may seem for employees, any time new shares are issued, the
of existing owners is diluted. That dilution must be weighed against the tax and
motivation benefits an ESOP can provide. Finally, ESOPs will improve corporate
performance only if combined with opportunities for employees to participate in
decisions affecting their work.