EMPLOYEE STOCK OPTION PLAN (ESOPs)

What are Employee Stock Option Plans?

The employee Stock Option Plan (ESOP) is also known as Employee Stock Ownership Plan. It is a system through which employees are allowed by companies to buy the latter’s shares. In other words, the company’s employees are given the right to acquire their employer’s shares. In some cases, a foreign holding/subsidiary company offers such options to the Indian subsidiary/holding company’s employees.

In ESOP, employees are given rights (stock options). They get the company’s shares for free or at discounted rates, at a predetermined price or the cost to be determined on the prefixed method, compared to the potential market cost.

Why do Companies Give ESOPs?

Usually, startups provide ESOPs to their employees, as the remuneration they offer isn’t as lucrative. But otherwise as well, providing ESOPs is a way to win the employee’s vested interest in the company. As shareholders, employees work more responsibly towards the company’s progress. The more the company grows commercially, the more they earn!

In some cases, employees provide ESOPs exercised on a future date. It refers to an incentive for a long-term commitment from the employee to the company.

ESOP Issuance Process

How do companies issue ESOPs? Let’s find it out.

Section 62(1)(b) of the Companies Act, 2013, and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 (“Rules”) governs ESOP issuance. ESOP issuance procedure under the Rules is similar to that under the Securities and Exchange Board of India Employee Stock Option Scheme Guidelines for listed companies. So, here’s how ESOPs are issued.

Prepare ESOP draft per Companies Act, 2013 and Rules.
Prepare board meeting notice and draft resolution to be passed in the board meeting.
Send the board meeting notice to all the directors at least seven days before the meeting.
Pass the resolution for share issuance through ESOP.
Specify shares price to be issued pursuant to ESOP and fix the time and date. Approve for calling the general meeting to pass a special resolution for ESOP issuance.
Send the board meeting draft meeting to every director within 15 days of its conclusion.
File the MGT-14 form with the Registrar of Companies of passing the board resolution.
Send the general meeting notice to each of the company’s directors, shareholder, auditors, and secretarial auditors at least 21 days before the meeting date.
Pass the special resolution for the share issuance under ESOP to the company’s employees, directors, and officers in the general meeting.
File the MGT-14 form with the Registrar of Companies within 30 days of passing the special resolution in the general meeting with the documents.
Send options to the company’s employees, directors, and officers for purchasing shares under ESOP.
Prepare and maintain a ‘Register of Employee Stock Options’ in Form No.SH-6. Record the particulars of the ESOPs granted.

If you are a private company that wants to issue shares under ESOP, you must ensure that you are authorized by the Articles of Association (AoA) to do.

Suppose you aren’t; you must first conduct an extraordinary general meeting to alter the AoA to include the provisions of share issuance through ESOP.

Then, you can proceed with holding the board meeting to pass the resolution and receive ESOP scheme approval from the shareholders.

Of course, there is more to ESOPs. But you must know it from experts. We hope these insights help you get a basic understanding, though.

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