An Option to Incentivise Key Employees in the Company
An Employee Stock Option Plan (ESOP) in India can be used as a performance motivator to ensure that all employees are working toward the same goal: To enhance the performance of the company.
When the performance and the productivity of the employees are high, the company becomes more profitable too. Therefore, an ESOP could be viewed as a win-win situation all around.
Stock options for employees were introduced under clause 15A Section 2 of the Companies Act 1956. It is governed by the Securities and Exchange Board of India (SEBI). SEBI also happens to be the governing body for Employee Stock Option Schemes (ESOS).
What Is an Employee Stock Option Plan (ESOP) in India?
ESOPs are incentives that the company grants to its key employees in the company. Although it could be open to all companies, some companies might choose to keep it selective. This is usually done when the company wants to retain its key top performers.
Under an ESOP, an employee can subscribe or purchase the company’s share for a predetermined price. It is a good way to incentivise employees beyond just the salary and to keep the key performers around for much longer. It allows employees to feel like they have a vested interest in the company. Employees will feel a sense of belonging and they will keep it in mind when thinking about changing jobs.
How the ESOP Plan Works
Employees will have to wait for about a year (minimum) until their shares get vested. Once they hit the one year mark, they can choose to sell or exercise that option at any time. It will depend on the market rates at the time, but there is generally no limit for the exercising and sale of shares.
An ESOP cannot be transferred between employees. Per the guidelines, on the employee’s death (while still an employee), all the share options granted to them will pass on to their legal heirs. This applies even if they are not an employee at the time of their death but they hold vested shares.
There are no clear regulations when it comes to the buy-back of shares. However, transferring stock options is prohibited. Employees are also prohibited from buying back shares through private arrangements or negotiated agreements.