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ESOPs have long been utilized to reward and honor senior employees who have made substantial contributions to the company. ESOPs are now employed as a compensation and incentive tool because businesses can't afford to pay high salaries in the early stages. Employee stock options have been increasingly popular in India in recent years, partly to the country's burgeoning startup culture.
As a result of their contributions, employees at Infosys, one of the first companies to provide ESOPs, have become billionaires. Google recently employed an Indian with a 1.2 crore annual compensation, half of which was in the form of an ESOP.
What are ESOPs (Employee Stock Option Plans)?
Employee Stock Option Schemes (ESOPs) are plans in which employees are given the option to purchase a fixed number of shares in the company at a discounted price instead of receiving a wage (less than the market price). The employee has the choice to exercise the scheme's option, but he or she is not obligated to do so.
Before exercising their right to purchase a specific number of shares, employees must wait a certain amount of time, known as the vesting period. Employees can pay the pre-determined exercise price to exercise their options to get shares after they have vested.
Employee stock ownership plans (ESOPs) are usually awarded to employees based on their performance or length of service with the company. As a result, it fulfills a dual purpose for both the company and its employees.
Employee Stock Option Plan Procedures
Compilation of a List of Employees Eligible for ESOP
This is the most crucial and initial phase in the ESOP system. Employees for the ESOP plan should be carefully selected based on their skills, positions, and responsibilities, among other considerations.
Policy development for the ESOP
For enterprises, this is the most critical stage. Important things to make while drafting an ESOP policy include:
Quantum of the ESOP pool.
Employees' selection and assessment criteria in the plan
Tag along, drag along, and pre-emption rights are examples of shareholder rights.
Rights of option holders
The Board of Directors must approve it.
After preparing a list of qualified employees, calculating the number of options, and developing an ESOP plan, the next step is to schedule a Board Meeting for final board approval. The list of plan participants, the draught ESOP plan, and the notice of general meeting for shareholder approval must all be approved by the board.
The General Assembly is meeting.
At a General Meeting of the Company's Members, the ESOP scheme will be authorised by Special Resolution. An ESOP can be issued by a private limited business with just an ordinary resolution.
submitting E-form MGT-14 with the Special Resolution for Scheme Approval, Explanatory Statement, Notice of General Meeting, and approved ESOP policy All companies (excluding private limited enterprises) must submit E-form MGT-14 with the Special Resolution for Scheme Approval, Explanatory Statement, Notice of General Meeting, and approved ESOP policy.
Grant letters are written and distributed.
Following shareholder approval, the company must issue a Grant Letter to all qualifying shareholders stating their entitlement, vesting schedule, vesting date, the final date for exercising options, exercise price, manner of executing options, and other terms and conditions.
Vesting of Employee Stock Ownership Plans (ESOPs)
There must be a minimum of one year between the time of option award and the time of option vesting. If you issue the option on April 1, 2019, it will not be able to be exercised until April 1, 2020.
Stock Ownership Plans for Employees (ESOPs)
Employees can apply for shares after the vesting period has been completed, or they can wait until the last day of the vesting term to exercise or not exercise their option. Employees have the option, but not the obligation, to buy stock through an ESOP.
Issuance of Stock Certificates
If shareholders apply for shares, corporations must allot the shares and file an e-form PAS-3 for share allotment that includes a Special or Ordinary Resolution for ESOP approval, a Resolution for share allocation, a list of allottees, and other documents.
Obtain a certificate of ownership and pay stamp duty
The corporation must give share certificates to the shareholders within 30 days following allotment. Companies must pay stamp duty on the issue of shares based on the state's existing stamp rates.
Conclusion
Employee stock ownership plans (ESOPs) are a terrific tool for firms to attract and retain talent, but they can be hazardous for employees. Employees must believe in the company's long-term success, and appropriate paperwork must be in place. Sign up now to receive stock market trade recommendations based on research.
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