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A Brief on Employee Stock Options Plan (ESOP) in India by a Private Limited Company

July 6, 2018     by Prasanna Nagure

An option is a right to purchase stock of a company sometime in the future for a stated price. It is a cashless perquisite which focuses on retaining key employees.

Who ESOP can be offered to:

  • Directors, employees, officers.
  • It can’t be offered to Promoters or Directors who directly or indirectly hold 10% shares in the company.
  • It can’t be offered to non-employees but can be offered to Directors, officers or employees of the holding or the subsidiary company.

Process of ESOP

  • The scheme of ESOP is required to be approved by shareholders in their General meeting.
  • The scheme contains details such as the identified employees to whom ESOP shall be offered, Valuation of shares, no of shares.

 

 

 

 

Valuation

Valuation of shares shall be done at the time of “grant of Option” by registered valuer and “exercise of option” by Merchant Banker. Therefore, valuation is to be done every time when the options are granted and /or exercised. Valuation not older than six months will be considered valid.

Expenses involved for Issuance ESOP

Apart from dilution in shareholding of promoters, the company should keep the following expenses in mind:

  • Fees payable to Registered valuer and the Merchant Banker for Valuation of shares
  • Fees payable to consultant for implementation of ESOP.
  • Administration cost throughout it’s tenure (can be an insider as well)

Exit options

  • IPO
  • To Strategic buyer / Investor, etc
  • Company buyback
  • Selling to an external buyer, subject to the Articles of Association

Trends in ESOP in India:

Indian companies are giving stock options to senior management — the CEO, the CXOs and those who drive growth. Among unlisted companies, majority of them grant options at an estimated fair value and only 25 per cent at face value.

Companies have a clause in their ESOP Scheme which says employees will be able to exercise their options only after a liquidity event, such as an IPO, buyback or strategic sale.

You can click on the below link to read our detailed blog on ESOP :

Employee Stock Option Plan under Companies Act 2013 for unlisted Companies

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