{"id":109365,"date":"2022-08-17T16:55:36","date_gmt":"2022-08-17T11:25:36","guid":{"rendered":"https:\/\/legalwindow.in\/?p=109365"},"modified":"2022-09-12T16:31:53","modified_gmt":"2022-09-12T11:01:53","slug":"esop-of-an-unlisted-company","status":"publish","type":"post","link":"https:\/\/www.legalwindow.in\/blog\/esop-of-an-unlisted-company\/","title":{"rendered":"ESOP by an unlisted public company and private company"},"content":{"rendered":"<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-109372 size-full\" title=\"ESOP of an unlisted company\" src=\"https:\/\/legalwindow.in\/wp-content\/uploads\/ESOP-by-an-unlisted-public-company-and-private-company.png\" alt=\"ESOP of an unlisted company\" width=\"1200\" height=\"630\" srcset=\"https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/ESOP-by-an-unlisted-public-company-and-private-company.png 1200w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/ESOP-by-an-unlisted-public-company-and-private-company-600x315.png 600w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/ESOP-by-an-unlisted-public-company-and-private-company-300x158.png 300w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/ESOP-by-an-unlisted-public-company-and-private-company-1024x538.png 1024w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/ESOP-by-an-unlisted-public-company-and-private-company-768x403.png 768w\" sizes=\"auto, (max-width: 1200px) 100vw, 1200px\" \/><\/p>\n<p><span style=\"font-weight: 400;\">An employee stock option plan (ESOP) is a frequently used incentive mechanism used by organizations. There are various reasons why company employees are given such stock options. The phenomenon of stock options is more prevalent in start-up companies that cannot afford to pay high wages to their employees but are willing to share in the company&#8217;s future prosperity. In such cases, employees receive stock options as part of their compensation package. This article will discuss the Employee Stock Option Plan for an unlisted company.<\/span><\/p>\n<table style=\"width: 100%;\">\n<tbody>\n<tr>\n<td style=\"border: 1px solid #555;\"><b>Table of Contents<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#are\"><span style=\"font-weight: 400;\">What are ESOPs?<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#of\"><span style=\"font-weight: 400;\">Purpose of issuing an ESOP<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#ESOP\"><span style=\"font-weight: 400;\">Eligibility of ESOP\u00a0<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#in\"><span style=\"font-weight: 400;\">ESOPs in unlisted companies<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#Employee\"><span style=\"font-weight: 400;\">Employee recognition<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#Special\"><span style=\"font-weight: 400;\">Special resolution<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#Separate\"><span style=\"font-weight: 400;\">Separate resolution<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#Compliance\"><span style=\"font-weight: 400;\">Compliance<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#Other\"><span style=\"font-weight: 400;\">Other duties<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#Final\"><span style=\"font-weight: 400;\">Final words<\/span><\/a><\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h2 id=\"are\"><b>What are ESOPs?<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">An employee stock option plan (ESOP) or employee stock option scheme (ESOS) is an option or right that a company offers to its employees to buy its shares at a predetermined price in the future. An ESOP is not an obligation, but it is an employee&#8217;s right to buy a certain amount of company stock at a predetermined price. An ESOP is a tool that a company uses to retain its employees and get them a reward for being associated with the company. As part of employee compensation, ESOP creates a sense of ownership in the minds of employees and their interest in the organization remains intact. ESOP plays a vital role in acquiring employees in the growing phase of the company.<\/span><\/p>\n<h2 id=\"of\"><b>Purpose of issuing an ESOP\u00a0<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">The purpose of issuing an ESOP is:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">To motivate to attract, retain and reward the company&#8217;s employees\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Motivate employees for growth contribution and company profitability<\/span><\/li>\n<\/ul>\n<h2 id=\"ESOP\"><b>Eligibility of ESOP<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\"><a href=\"https:\/\/legalwindow.in\/private-limited-company\/\" target=\"_blank\" rel=\"noopener\">Private companies<\/a>: The approval of the shareholders in the form of an ordinary resolution is required to offer an ESOP. (Notice dated June 5, 2015).\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Public Companies: Rule 12(11) specifically provides that where the shares of the Company are listed, the ESOP shall be issued following SEBI regulations.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Other than private companies (i.e. unlisted public companies): Shareholders&#8217; approval based on a special resolution is required under section 62 of the Companies Act, 2013.<\/span><\/li>\n<\/ul>\n<h2 id=\"in\"><b>ESOPs in unlisted companies<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">The Companies Act, 2013 and the Equity and Debentures Rules contain provisions for the provision of ESOPs to employees of unlisted companies. In section 62 of the 2013 Act states that a company can create an ESOP scheme only based on a special resolution. Rule 12 of the Rules (Equity and Debentures) lays down the procedure for setting up such a scheme and the protocols to be followed for it. Below are the steps to create an ESOP scheme:<\/span><\/p>\n<h2 id=\"Employee\"><b>Employee recognition<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Under Rule 12 of the (Share Capital and Debentures) Rules, 2014, limited companies can only issue ESOPs to employees who are defined as:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Permanent employees residing in or outside India<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Directors, whether whole-time or not, but excluding an independent director.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Employees of a subsidiary or holding company located in or outside India except for a promoter or director who directly or indirectly owns more than 10% of the shares.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">However, a start-up company recognized by the Department of Promotion of Industry and Internal Trade (DPIIT) is exempted from restrictions on founders and directors for 5 years from incorporation or registration date.<\/span><\/p>\n<h2 id=\"Special\"><b>Special resolution<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Following the recognition of &#8220;employees&#8221; under Rule 12, the company&#8217;s shareholders are required to approve the employee stock ownership plan through a special resolution at the general meeting. The company is also required to include certain disclosures with the ESOP approval notice. Some of these disclosures are:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Total number of shares awarded<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Recognized classes of employees<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Lockout period<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Vesting period<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Date of application<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Exercise term<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Maximum options are granted per employee.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Dates and periods of application in case of termination, resignation, etc.<\/span><\/li>\n<\/ul>\n<h2 id=\"Separate\"><b>Separate resolution<\/b><\/h2>\n<p><span style=\"font-weight: 400;\"><a href=\"https:\/\/legalwindow.in\/shareholders-agreement\/\" target=\"_blank\" rel=\"noopener\">Shareholders<\/a>&#8216; approval in the case of the grant of an ESOP to a subsidiary or holding company or an ESOP amounting to or exceeding 1% of the share capital granted to employees must be taken in the form of a separate resolution.<\/span><\/p>\n<h2 id=\"Compliance\"><b>Compliance<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Rule 12 also imposes certain compliances on the company, such as:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Keeps records of employee stock options on form No. SH.6 and provides information on the option granted according to section 62 of the Act.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Maintain the above-mentioned registered office of the company or another place decided by the company&#8217;s board of directors.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Entries in the register are verified by the company secretary or another person authorized to do so by the board of directors.<\/span><\/li>\n<\/ul>\n<h2 id=\"Other\"><b>Other duties<\/b><\/h2>\n<p><span style=\"font-weight: 400;\"><a href=\"https:\/\/www.mca.gov.in\/content\/mca\/global\/en\/acts-rules\/ebooks\/rules.html\" target=\"_blank\" rel=\"noopener\">Rule 12<\/a> also provides certain precautions and guidelines to be followed by the company:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Rule 12 Sub-rule 5: The Company may modify or vary certain terms and conditions of the ESOP by special resolution provided that such changes are fair to the employees.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Rule 12 Sub-rule 6: This rule allows the company to provide a minimum period of 1 year between the grant of options and the vesting period. It allows the company to determine the blocking period. It also states that no employee will be entitled to vote or receive any dividend on stock options until the shares are issued upon exercise of the option.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Rule 12 Sub-rule 7: This rule deals with the conditions under which any amount paid by an employee may be forfeited or refunded.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Rule 12 Sub-rule 8: As per Rule 8, the transferability to any other person is restricted. However, in the event of the employee&#8217;s death, legal heirs and trustees may exercise the right.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Rule 12 Sub-rule 9: This rule covers several other aspects, apart from the above information, which must be disclosed by the board in the director&#8217;s report for the year.<\/span><\/li>\n<\/ul>\n<h2><a href=\"https:\/\/legalwindow.in\/roc-company-annual-filing\/\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-109370 size-full\" title=\"Annual ROC compliances for companies\" src=\"https:\/\/legalwindow.in\/wp-content\/uploads\/Get-ROC-Annual-filings-starting-from-3000-..png\" alt=\"Annual ROC compliances for companies\" width=\"1000\" height=\"200\" srcset=\"https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/Get-ROC-Annual-filings-starting-from-3000-..png 1000w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/Get-ROC-Annual-filings-starting-from-3000-.-600x120.png 600w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/Get-ROC-Annual-filings-starting-from-3000-.-300x60.png 300w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/Get-ROC-Annual-filings-starting-from-3000-.-768x154.png 768w\" sizes=\"auto, (max-width: 1000px) 100vw, 1000px\" \/><\/a><\/h2>\n<h2 id=\"Final\"><b>Final words<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">ESOPs are undoubtedly the predominant method used by companies to attract, motivate and retain employees. This ESOP tool has the dual benefit of reducing cash outflow and retaining deserving employees for their growth. Employees also see this program as a long-term investment that they must compensate with their cash benefits and bonuses. Since many companies have now created ESOPs as part of compensation for key employees, the employee needs to be aware of their tax liability. ESOPs are beneficial to both employees and startups if implemented effectively. A sense of ownership acts as a motivation for employees to work hard and diligently.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>An employee stock option plan (ESOP) is a frequently used incentive mechanism used by organizations. There are various reasons why company employees are given such stock options. The&hellip;<\/p>\n","protected":false},"author":5,"featured_media":109371,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[26],"tags":[],"class_list":["post-109365","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-compliance"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>ESOP of an unlisted company &#187; Legal Window<\/title>\n<meta name=\"description\" content=\"This article tell you about the ESOP of an unlisted company, Purpose of issuing an ESOP, &amp; Eligibility of ESOP.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalwindow.in\/blog\/esop-of-an-unlisted-company\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"ESOP of an unlisted company &#187; 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