Know the entire Procedure for Issue of ESOP by Company

As a business owner, you may have heard of Employee Stock Ownership Plans (ESOPs), but you may not know much about them. Employee Stock Ownership Plans (ESOPs) are a type of retirement plan that allows employees to hold stock in the company for which they work. There is a precise protocol for issuing an employee an ESOP. There are numerous advantages to issuing ESOPs, and we’ll go through the Procedure for Issue of ESOP by Company.

Before we move on to discuss the procedure for issue of ESOP for Private Companies, let’s first discuss the meaning of the Employee Stock Option Plan in great detail.

Meaning of Employee Stock Option Plan

Employee Stock Ownership Plans, sometimes known as ESOPs, are retirement plans that allow employees to own stock in the business they work for. It’s a method of transferring ownership from the business to the workers, and it may be a terrific way to reward staff, foster a sense of ownership, and build a sense of community. An ESOP, however, isn’t only about the workers; it’s also about the business. Offering an ESOP makes a business more appealing to potential buyers and might be a means of raising capital for expansion.

 Stocks in the company are handed to permanent employees, who can either sell them or keep them for retirement. The corporation is permitted to deduct the value of the stock from its taxes, and the stock is typically issued at a discount.

It is distributed by the company to its staff in an effort to promote employee ownership of the company as a whole. Employees receive discounted prices on the shares of the companies. Any business may issue ESOP. It must be issued in compliance with the provisions of the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014. This applies to all businesses other than those that are publicly traded. The Securities and Exchange Board of India Employee Stock Option Scheme Guidelines should be followed by listed companies while issuing employee stock options.

Employee stock options are described in Section 2(37) of the Companies Act, 2013, as the right granted to directors, employees, or officers of the company or of its holding or subsidiary company to purchase, benefit from, or subscribe for the shares of the company at a fixed price at a future date. Accordingly, an ESOP is a plan where a business suggests increasing its subscribed share capital by issuing more shares to its employees at a set rate.

Importance of Employee Stock Option Plan

Because it provides employees a stake in the business, ESOP is significant. They experience a sense of ownership and become more invested in the company’s success when given the chance to purchase shares in it. This is advantageous since motivated individuals are more likely to contribute positively and stick with a company over the long term. Studies have actually found that organizations with an ESOP have lower employee turnover rates and are generally more productive. 

Both the company and its employees gain from ESOP. It is advantageous for startups when workers may receive rewards after the company goes public. If they meet the requirements, any employee of the company may be given an ESOP offer.

Therefore, if you’re seeking for a means to increase employee engagement and productivity, think about issuing an ESOP. It’s an excellent method to show your employees how much you appreciate them and involve them in the growth of the business.

 Regulatory Provisions of the ESOP under Companies Act, 2013

The Companies Act, 2013 has the following controlling provisions for the ESOP: 

• Section 62 (1) (b) of Companies Act, 2013 
• Section 2(37) of Companies Act, 2013 
• Rule 12 of the (Share Capital and Debentures) Rules, 2014

Issuance eligibility of Employee Stock Option Plan

According to Rule 12(1) of the Companies (Share Capital and Debentures) Rules, 2014 the following employees are eligible to receive an ESOP:

• A company’s long-term worker who is based in or outside of India.
• A director of the company, whether they are employed full-time or part-time; independent directors are not included.
• A permanent employee or director of a holding company, associate company subsidiary company based in India or abroad.

The following employees are ineligible for ESOP from their employer:

• An employee who is a company promoter or a member of the promoter group.
• A director who controls more than 10% of the outstanding equity shares of the company, directly or indirectly, either personally, through a body corporate, or through a relative.

However, for 10 years following the date of establishment, Startup Companies are exempt from the aforementioned two restrictions.

Advantages of Employee Stock Option Plan

The following are the advantages of ESOP:

• Long-Term Investment- The main advantage of an ESOP is that it provides employees with long-term equity participation in the company. ESOPs, as opposed to other kinds of remuneration such as cash incentives or salary increases, provide employees with a tremendous potential to gain as the company develops and expands. This also motivates them to work harder and do better.

• Employee Retention Over Time- An ESOP aids in the retention of employees for an extended length of time. Employee stock option plans allow employees to participate in the company for which they work and thereby become an integral part of it. If an employee feels valued by management, they are more likely to stay with the organization for a longer period of time.

• Motivational Factor- The goal of an ESOP scheme is to incentivize employees to raise their production and performance. Employees who have a sense of ownership in the organization for which they work tend to put in greater effort. An ESOP is more than just a financial incentive; it promotes employee motivation.

• Corporate Development and Growth- Companies frequently use ESOP plans to recognize top performers, foster goodwill among employees, and boost employee morale. In the long run, an ESOP program can be immensely helpful to the company’s growth and development.

How do you select the best ESOP for your Company?

So, you’re thinking about an ESOP for your company. That’s fantastic! However, before you begin the procedure for issue of ESOPs, you must first choose which sort of ESOP is best for you. ESOPs are classified into two types: 

• The cash ESOP, as well as;
• The ESOP with equity. 

The cash ESOP is exactly what it sounds like: employees are paid in cash in return for their shares. The equity ESOP, on the other hand, permits employees to keep their company shares, but they are taxed.

Which sort of ESOP is best for you will depend on a variety of factors, including the size and age of your company, as well as the number of employees. So, consider about what’s best for the company and its employees, and then visit a legal expert to learn more. You can take the assistance of our Experts at Legal Window on 072407-51000 or email admin@legalwindow.in.

Procedure for Issue of ESOP by Company

The issue of ESOP is governed by Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 (“Rules”). The approach for issuing ESOPs under the Rules is similar to the procedure for listed companies under the Securities and Exchange Board of India Employee Stock Option Scheme Guidelines. Procedure for issue of ESOP for Private Company are as follows:

• Prepare an ESOP draft in line with the Companies Act, 2013 and the Rules.
• Prepare the notice for the board meeting, as well as the draft resolution to be voted on during the meeting.
• Send the board meeting notification to all directors at least seven days before the meeting.
• Pass a resolution authorizing the issuance of shares via ESOP, decide the price of shares to be issued via ESOP, and set a time and date for the general meeting to pass a special resolution authorizing the issuance of ESOP.
• Send the draft minutes of the board meeting to all directors within fifteen days of its conclusion, and file the MGT-14 form with the Registrar of Companies when the board resolution is passed.
• All of the company’s directors, auditors, shareholders, and secretarial auditors must get notice of the general meeting at least 21 days prior to the scheduled date of the meeting.
• Pass the special resolution authorizing the general meeting to issue ESOP shares to the company’s employees, directors, and officers.
• Within thirty days of the general meeting passing the special resolution, submit the MGT-14 form and the supporting documentation to the Registrar of Companies.
• Send stock purchase options to the company’s directors, officials, and staff members.
• Keep track of the details of the ESOPs awarded to the company’s employees, directors, and officers in a “Register of Employee Stock Options” on Form No. SH-6.
• If a Private Company intends to issue an ESOP, it must make sure that the issuing of shares through an ESOP is authorized under the Articles of Association (AoA). If the AoA does not authorize the issuance of shares through ESOP, the company must first hold an extraordinary general meeting to amend the AoA to include those provisions before proceeding to hold the board meeting to pass the resolution and obtain shareholder approval for the ESOP Scheme.

Distribution of Employee Stock Option Plan

The time of the issuing of shares through an ESOP to the employees is primarily governed by three terms. The list is as follows:

• Grant- By “grant,” it implies the distribution of stock to employees. It entails alerting the worker of his ESOP eligibility. While giving the employees the option of an ESOP, the corporation will be allowed to choose the exercise price.

• Vest- The ability of the granted employees to apply for their shares is referred to as the vest. For the ESOP scheme, there must be a minimum of a year between the option’s award and vesting.

• Exercise- The employees might exercise their option to purchase shares throughout the exercise period. The lock-in period for the shares issued (if any) following the execution of the option may be determined at the company’s discretion. Before the shares are issued upon the execution of his option, the employees will not have the right to dividends, the right to vote, or the privileges of a shareholder with respect to the ESOP granted to him.

Information Should Be Disclosed When Issuing Employee Stock Option Plan

In the explanation statement attached to the notice for approving the special resolution for the issue of ESOP, the company should disclose the following disclosures:

• How many stock options will be awarded overall,
• The specified group of workers that are eligible to take part in the ESOP,
• Requirements for the ESOP’s vesting time,
• The maximum amount of time that options can be vested,
• The cost of exercise and the process of exercise,
• The length of any lock-in period
• The provision of the greatest amount of options to an employee,
• The methodology by which the corporation values its options,
• The criteria for the expiration of employee options,
• A declaration that the company will follow the applicable accounting rules.

Way Forward

Employee Stock Ownership Plans (ESOPs) can be utilized to reward and inspire employees. It is a method for a company to give its employees a stake in the company. Issuing an ESOP can be a laborious procedure, but the benefits it can bring to both the company and its employees make it worthwhile. The procedure for granting ESOP appears hard, but with the appropriate advice, it is simple.

 If you’re seeking for a seamless way to streamline the process of giving ESOPs to your employees, Legal Window can supply you with best-in-class solutions that will help your entire process run more smoothly.