Employee Stock Option Plan (ESOP) and its Requirements

Employee Stock Option Plan (ESOP)

Employee Stock Option Plan (ESOP) means the compensation granted by the company to its employees.

What is the Employee Stock Option Plan(ESOP):

The Employee Stock Option Plan(ESOP) is referred to as the situation when the company offers share Capital(stock) to its employee to subscribe at a price that is lower than the market price. Rather than granting the share directly to the employees, the company gives a different option to them. For example, The company can give regular call options or give the right to subscribe to the share within the predefined period of time. That’s why it is known as the Employee Stock Option Plan and the word option is used in the name of the plan.

This is just the offer of all employees, so they can accept it or reject it. It is not compulsory for employees to subscribe. 

The requirement for the company to issue stock option:

According to the Companies Act, 2013, and guidelines issued by the SEBI (Security and Exchange Board of India) the company has to meet some requirements to issue the employee stock option plan.  These Requirements are shown as following: 

1. Same Class of Shares:-

The share(stock) given as an option to subscribe to employees should be the same as already issued in the market for the public subscription(in case of listed shares). The company can’t change the class of the shares to be optioned given to the employees. 

2. Authorised Resolution:

These shares will be authorized before issued by approving the special resolution by the company. All terms and conditions regarding the issues of share should be passed in this resolution. 

3. Followed all SEBI Guidelines:

If the Company list with the SEBI (Security and Exchange Board of India) then it should have to follow all guidelines issued by the board from time to time. 

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References: –

  1. sebi.gov.in
  2. Class +2 Accountancy by Sultan Chand & Sons (P) Ltd.

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