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Employee Stock Option Plan

Employee Stock Option Plan

Employee Stock Option Plan (ESOP) is a plan through which a company awards Stock Options to the employees based on their performance. Under an ESOP, the employees have right to buy the shares of the company on a predetermined date at a predetermined price. The objective of ESOP is to motivate the employees to perform better and improve shareholders’ value.

Employee means:-

a)a permanent employee of the company working in India or abroad ; or

b)a director of the company whether a whole time director or not

c)an employee as defined in (a) or (b) above of a subsidiary, domestic or overseas, or of a holding company of the company.

d) An employee who is a promoter or a part of the promoter group shall not be eligible to participate in the Employee Stock Option Plan of the company.

e) A director who either by himself or through his family or through any investment  Company,  directly or indirectly holds more than 10% of the outstanding equity shares of the company shall not be eligible to participate in the Employee Stock Option Plan.

Exercise means an application being made by the employee to the company tohave the options vested in him issued as shares upon payment of the option price.Exercise can take place as specified after vesting.

Grant means a process by which an employee is given an option.  It is the delivering of the optionsto the employee. Grant shall specify the number of options given, the time of vesting.

Option means a right but not an obligation granted to an employee under the ESOP to apply for and be allotted shares of the company at a price determined earlier, during or within a specific period of time, subject to the requirements of vesting.

Vesting period means the period over which the vesting of the options of the employee takes place.  Vesting period can be a single time period or a series of time periods. 


These Guidelines shall apply to any company whose shares are listed on any stock exchange in India.The stock exchanges are being advised separately that the shares issued pursuant to an ESOP would be eligible for listing only if such instruments were in accordance with these Guidelines

Different types of ESOPs:-

Employee Stock Option Scheme (ESOS)– Under this scheme, the company grants an option to its employees to acquire shares at a future date at a pre-determined price.  Generally exercise price is lower than the prevalent market price.

Employee Stock Purchase Plan (ESPP)– This is generally used in listed companies, wherein the employees are given the right to acquire shares of the company immediately, not at a future date as in ESOS, at a price lower than the prevailing market price.

Share Appreciation Rights (SAR)– Under this scheme, no shares are offered or allotted to the employee. The employee is given the appreciation in the value of shares between two specified dates as an incentive or performance bonus.

As per section 81(1a) of Companies Act, 1956 “Issue of stock options requires approval of shareholders by way of a special resolution. This is not applicable for private companies who can issue stock options without shareholder approval but approval by the board of directors is mandatory.”

 Treatment of ESOP as per Income Tax Act 1961: It is taxable in the hands of employee only.

Under Salary Income

ESOP will not be taxed as perquisite in hands of employee irrespective of fact whether it is as per guidelines of central government (ie Approved) or not.

Under Capital Gains

Employees will be subject to capital gains tax when they transfer shares /securities acquired under ESOP.


Directors’ Report:

 Board of Directors shall disclose details of the Stock option planeither in the Directors Report or in the annexure to the Director’s Report, regarding no. of shares covered by ESOP, pricing formula, options granted, vested, exercised & forfeited and money realised by such option etc.

 Accounting policies:

 As per SEBI guidelines listed companies have to account for ESOP by treating the same as an expense. As yet there is no clarity whether this expense will be allowed as deductible expense by the Income Tax authorities.

In respect of options granted during any accounting period, the accounting value of the options shall be treated as another form of employee compensation in the financial statements of the company.


 ESOPs are another potential source of funding used by existing com­panies that have high confidence in the stability of their future earn­ings and cash flow. An ESOP is a program in which the employees become investors in the company, thereby creating an internal source of funding. An ESOP is a tax-qualified retirement benefit plan.

Employee Stock Option Plan

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