An ESOP – Employee Stock Purchase Plan refers to a benefit plan that offers employees a stake in the business. Employee stock ownership plans are issued in the form of direct shares, profit sharing plans or incentives, and the employer has the ultimate discretion in determining who should exercise these options.

Employee share ownership plans are frequently used by organizations as a method to recruit and retain high quality workers. Stocks are allocated on a staggered basis by organizations. Companies offering ESOPs have long-term goals. Companies not only want to keep their workers for a long time, they also plan to make them stakeholders in their business. Most IT companies have alarming attrition rates, and ESOPs will help them minimize such attrition by providing inventory to attract talent. With ESOPs, an employee takes advantage of the nominal purchase rate of the company’s shares and sells them and makes a profit.

From the employee’s point of view, these programs help to create a sense of ownership and ownership of the employer’s company and to invest in its development and thus encourage long-term commitment. An introduction to employee stock option plans and similar benefits offered to their employees by limited liability companies in India can provide valuable insight into current corporate job opportunities.

Generally, neither advisers nor independent directors are eligible to participate in ESOPs. More importantly, the founders or promoters of a business can only participate in an ESOP if the business is a start-up registered under Indian law. If the objective is to encourage the founders or promoters of a company to commit to certain social benefit plans, alternative mechanisms will have to be adopted by the companies.

Employees and managers of companies in India are also allowed to participate in ESOPs of their holding companies outside India, either as part of a cashless program or when a price variable is involved. However, if such an option were to be exercised by an employee or director in India, much of the tax compliance is relevant and should be carefully considered before the option to participate.


An employee stock purchase plan is an employee benefit plan eligible under the Internal Revenue Code of 1986, for favorable tax treatment. If it complies with the various rules for participation, acquisition, delivery and others defined by the Code, a plan is eligible. An ESOP invests primarily in the shares of the company that funds the ESOP, defined as a form of deferred compensation plan. An ESOP must also comply with the Employee Retirement Income Protection Act 1974 (ERISA), certain reporting and disclosure provisions, and fiduciary duty laws. The ERISA Code and Specifications jointly protect the rights of employees.

An ESOP is a defined contribution plan, which means that the employer’s contribution is defined and the employee’s profit is variable. A sufficient number of company shares or cash contributions during the employee’s employment is credited to each participating employee’s account. In the event of retirement, death, disability or other termination of employment, the employee’s account will be allocated to the former employee in stock, cash or a combination of both, the amount being determined by adding the actual fair market value to the number of shares of the shares of the company allocated to the former employee’s account. Therefore, an employee’s profit is not specified but depends on the value of the stock.

The flagship case of Deputy Commissioner of Income Tax v Ruchika Chemicals Pvt. Ltd. specified that the essence of the complaint formulated on behalf of the evaluated is that he should have complied with the injunctions of the SEBI and obeyed the instructions relating to the employee stock option plan.

In the striking case of Senior Income Tax Commissioner c. Veeran Pvt. Ltd., the court ruled that the majority of the shares had not been received from the settler from the market and that the shares that had been received from the settler under the employee stock option plan had been held with him for a long period.

In two stages, the ESOP is taxed. The first employees exercised the option – when ESOPs operate, the strike price minus the value of the security and withholding tax is considered a requirement in the hands of the employee. The total sum of the shares allotted to an employee, listed on any stock exchange in India, is the average market price on that date. If the shares are not listed, a valuation certificate will be requested for them, which must not be older than 180 days from that date.

Second, the employee ultimately sells the shares purchased under the ESOP. Under capital gains, such transactions would be charged. Again, listed and unlisted stocks are treated differently: if held for more than a year, listed stocks become long-term, while unlisted stocks become long-term after 3 years. Long-term capital gains are fully exempt under Section 10 (38) of the Income Tax Act when traded on a stock exchange. Section 112A of the Income Tax Act, if the long term capital gains exceed Rs. 1 lakh, then as of April 1, 2018 the excess amount is taxable at the rate of 10% without indexation. If the securities are not sold on the stock market, the long-term capital gain would be measured after indexing the initial price, i.e. imposed at the flat rate of 20% plus the increase and the end of studies. .


It can be divided into two groups when it comes to classifying ESOPs, namely:

  • Non-compensatory scheme
  • Compensatory regime

Non-compensatory scheme

By virtue of this, no benefit / compensation is earned by the employees. The fundamental objective of such a strategy is either to diversify the shareholding to include employees, or to increase the additional capital of the company. In a non-compensatory regime, the shares will be at market price on the exercise / investment date in the future.

Compensatory regime

Employees are paid / paid in this group. In other words, the services rendered by the workers are partly remunerated for the issuance of shares of a certain amount. These types of plans are used by companies to inspire employees. Compensatory benefits are particularly beneficial for fast-growing knowledge-based companies that generally do not pay high wages to their employees.


Prepare the draft employee stock option plan in accordance with section 62 (1) of the Companies Act, 2013 and the rules and guidelines given on ESOPs in 1999

When it comes to ESOPs in India, there are no clear instructions given by the Institute of Chartered Accountants of India (ICAI). The Guiding Principles are the guidelines issued by the Securities and Exchange Board of India (SEBI) in 1999.

The legal standards and accounting procedures to be applied in the context of ESOPs are governed by these directives. Although an ICAI Guidance Note was issued in 2003 in conjunction with the ICAI Professional Ethics, the provisions of the Guidance Note are not necessary for compliance, and such a note simply offers advice to preparers and auditors of financial statements on all accounting matters.

During the years 2002 and 2003, the SEBI guidelines were amended and now the amended guidelines provide for full disclosure of the compensation expenses for stock options determined using the fair value method as well as the effect on basic and diluted EPS for non-recognition of fair value. compensation costs.


Recently, in 2013, SEBI restricted the scope of ESOPs by restricting the purchase of its own shares on the secondary market by listed companies.

The concern was that, through corrupt practices, the development and administration of such programs would contribute to inflation, deflation or volatility in the price of securities. Subsequently, a proposal was made to replace the ESOP guidelines with a set of regulations aimed at ensuring better compliance capacity, providing a regulatory structure for all forms of benefit plans, including actions of the ‘company, in order to resolve the problems posed by the composition of employee welfare trusts, disclosures, etc., and to enable secondary market transactions with adequate information. The proposal was approved at the SEBI Board of Directors meeting in June 2014 and, therefore, the SEBI issued a new ESOP regulation on October 28, 2014.


The employee stock option plan increases the productivity of workers because it gives them the opportunity to make further attempts to fairly divide the share of profits in the company. As ESOPs have virtually no personnel costs and are also a fantastic recruiting tool, business owners who want to fund their own organization with a tax-deductible donation are the most sought after. ESOPs can also be a very powerful forum where employees can reap retirement benefits without giving up their company’s stock options. While ESOPs can be useful for many businesses, they are not very useful for large businesses that are too valuable to buy and very small businesses that are affected by low sales and fewer employee issues. For businesses looking for liquidity and succession alternatives, it is straightforward to outline the benefits of ESOPs. However for ESOPs, there are good reasons not to go. Employee share ownership policies have complicated rules that require significant monitoring. While this can be managed by outsourcing this role to external advisors and ESOP Third Party Administration (TPA) companies, the ESOP organization needs internal staff to support this program.

BIBLIOGRAPHY,with%20founders%20of%20the%20companies htm / amp? usqp = mq331AQFKAGwASA% 3D & _js_v = 0.1 # aoh = 16059758579110 & referrer = https% 3A% 2F% & _tf = From% 20% 251% 24s & share = https% 3A% 2Fb% 2Fwwv18% esops-in-times-of-the-covid-19-pandemic-5854791.htm

Description and objective of an ESOP – Employee share ownership plan | The National Law Review (

Source link

About The Author

Related Posts