What is Employee Stock Option Plan

An ESOP also known as Employee Stock Option Plan refers to a benefit plan which offers employees an option to acquire the shares in the organization, it is one of the most important tools to encourage and retain the best talents of company for longer period. Employee Stock Option Plans are just options that could be purchased at a specific price before the exercise date. They are defined in Companies Rules and Regulations under the Companies Act, 2013 which employer need to follow for granting Employees Stock Option Plan to their employees.

A company grants an ESOP to its employees for acquiring a specified number of shares of the company at future date on a predefined price for a particular time period (in years) which is called Lock In period. It means employee is bound to work for the company unless and until the entire stock option is expired. There is no limit on number of employees for the issue of ESOP. There shall be a minimum period of one-year gap between the grant of options and vesting of option.

In some of the cases, the foreign holding/subsidiary/ company can also grant such options to the employees of the Indian subsidiary/ holding company. The eligible employees are under no compulsion to buy these number of shares and are free to reject the offer if they wish. The option granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered in any other manner.

Only the employees to whom the option is granted shall be entitled to exercise the option subject to the event of the death of employee. cases where an employee suffers a permanent disability in employment, the options granted to him as on the date of permanent disability, shall vest in him on that very day.

Companies also allow the vesting of ESOP through a trust. Normally Trusts are created by the listed entity to ease the vesting of ESOP and opting the cashless allotment of ESOPs. Companies are required to maintain a Register of Employee Stock Options in Form SH-6 and the Register is required to be maintained at the head office of company or any other place decided by the Board.

Eligibility Criteria for Granting ESOP

1. An employee of the company who has been working on a permanent basis

2. A Director but not an independent director of the company

3. An employee covered above of a holding or associate company of the company who does not belong to the promoter group or a Director holding more than 10% shares of company, directly or indirectly.