All about Employee Stock Option Plan (ESOP)

Last Updated On: Nov. 21, 2021, 7:14 p.m.


What is ESOP?

Employee Stock Option Plan(ESOP) Scheme for private companies was introduced in the Companies Act, 1956. As per the Companies Act,1956  ESOP Scheme is an option given to the whole-time directors, officers or employees of a company, which gives such directors, officers or employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price.


In the amended Companies Act 2013, one aspect of holding company was added to this definition. Under the amendment, holding or subsidiary companies of the parent organization can also allocate securities and equity shares to the employees as a reward


What is the definition of Employee?

An employee can be a person who is:-

  • A permanent employee of that organization.
  • A director of that organization.
  • Employees of a subsidiary of that Company.
  • However, employees do not include, Any employee(s) who was or is a promoter or an employee(s) of the promoter group. Further, any director who (directly or indirectly ) owned more than 10% of the equity shares of the organization.

The ESOP scheme can be provided by the Company through two ways:

  • Equity Route
  • Trust Route


What are the benefits of ESOP?

  • The employee gets financial benefits which will be more than bonuses and incentives
  • Employees become part of the decision-making process of the company and they feel more responsible
  • ESOPs provide more job satisfaction and job security to the employees



How Does this Scheme work in Indian Companies?


STEP 1: Earlier, the ESOP scheme should have been passed via ‘special resolution’, and then filed with the Registrar of Companies. But after 2015, this lengthy procedure was removed and now the Company should draft an ESOP plan and take approval of all shareholders.

STEP 2: While allocation ESOP alloctaion to the employees, a ‘Letter of Grant’ is issued to the employees stating the number of shares allocated, vesting period, finding out the exercise price, and more. Note that options are not shares, but the right to own the shares.

STEP 3: In case the employee wishes to exercise the options granted under the Letter of Grant, they will need to make an ‘Exercise Application’. Once this is done, the options are converted into shares.


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