Employee Stock Option Plan (ESOP)

Employee Stock Option Plan (ESOP) is an employee benefit scheme that enables employees to own shares in the company. Employee benefit programmes that allow employees to acquire stock in the company include employee stock option plans and employee stock ownership plans (ESOPs). Employees purchase these shares at a price that is less expensive than the market price, or discounted pricing.
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Overview of Employee Stock Option Plan (ESOP)

An employee benefit plan known as an employee stock ownership plan (ESOP) provides employees with shares of stock that represent ownership in the business. Employers frequently use ESOPs as a corporate finance approach to balance the interests of their employees with those of their shareholders since they provide the sponsoring company—the selling shareholder—and participants with significant tax incentives, making them qualifying plans.

Making ESOP available has the goal of increasing an employee’s commitment to the business. In other words, ESOP encourages employees to take ownership of the business and to devote themselves to it for the long term.

Employees will concentrate more on doing better work for the company if they feel like shareholders in the business, which will give them a sense of pride in the organisation.

Advantages of Employee Stock Option Plan (ESOP)

Built-in Buyer In a market that is quickly becoming saturated with businesses up for sale, the vast number of baby boomers looking to sell their businesses can find a buyer with the aid of an employee stock option plan.
Tax Benefits ESOPs can offer a variety of tax advantages if the business complies with a long list of requirements. Furthermore, even while establishing an employee stock ownership plan is pricey, depending on the company, its structure, and a variety of other factors, it can be less expensive than selling the company.
Owner and employee advantages The Employee Stock Option Plan then has the potential to reward key management and staff for their dedication and success while safeguarding the history and stability of the organisation. Still, those the owner knows and trusts are the owners of the company.

Registration Process

The issuance of shares through an ESOP should be authorised under the Articles of Organization (AOA). If this specific clause is missing from the AOA, an extraordinary general meeting must be held before the procedure to change the AOA and add this clause can be started.

Step 1: Drafting a reference to the Companies Act of 2013 as the first stage in the procedure used to create an ESOP.

Step 2: The proposed resolution must then be presented to all of the directors and shareholders during a board meeting.

Step 3: The ESOP scheme should be approved by all of the company’s shareholders and directors for further resolution..

Step 4: To approve the special resolution for issuing the ESOP, the general meeting should consider the price of the shares to be issued as well as the designated time and date.

Step 5: The ROC must receive an MGT-14 before the board resolution can be adopted. Within 15 days of the meeting’s end, the draught minutes should be distributed to all of the directors.

Step 6: The general meeting should pass the special resolution for issuing the shares under the ESOP plan to the company’s employees, directors, and offices. The MGT-14 form must be submitted to the RoC within 30 days after passing the special resolution, starting on the day the resolution was passed.

Step 7: Form SH-6, in which all the details of the ESOP must be filed and the employees must be issued stock options, must be used to build and maintain the register of employee stock options.

Required Documents

1. Minutes of a board meeting

2. Special resolution approving ESOP along with the explanatory statement

3. Minutes of the general meeting

4. Boards report

5. Register of employee’s stock option plan

6. PAS- 3, MGT- 14

FAQ's Employee Stock Option Plan (ESOP) :-

By exercising their ESOP rights, employees frequently pay a low price to purchase the shares granted to them. As a result, they can purchase shares in the business at a lower price.
While holding shares under an employee stock option plan, an employee does not pay taxes on such shares. They have the option of selling their stock on the open market or returning it to the business if they leave the organisation or retire.
Certainly, future employees may be included in the ESOPs plan.
Being a part of an ESOP company can provide employees special benefits. Significant retirement benefits are available to plan participants at no expense to them. An ESOP is also a great approach to improve the company’s capacity for attracting and retaining outstanding people.

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