Employee

Stock
Option or
Ownership
Plan.
(ESOP)
 What is an ESOP?
• An Employee Stock Option Plan is when the
company offers its shares to the employees.

• An ESOP is nothing but an option to buy the

company's share at a certain price. This could either
be at the market price (price of the share currently
listed on the stock exchange), or at a preferential
price (price lower than the current market price).
 Why It is given?
• Employees can receive stocks and
shares of their company through a
bonus, buy them directly from the
company, or receive them through an
ESOP.
• The main purpose of an ESOP is to
reward and motivate employees
• Companies reward their top bracket
management and executives with
ESOPs.
• It is basically used as an employee
retention tool to keep the top bracket
management and executives in the
company
 General Eligibility
• The concerned employee must have completed a year working for the
company.
• The employee should hold a key position in the company.

• The employee should belong to the "must retain" category.

• The employee must show company loyalty and have positive

performance appraisals.
• ESOPs are generally given to employees who have served for a long
period of time or promise to do so at the time of employment
• The management committee will reward ESOPs only to those who
have handled a lot of responsibilities in the functioning of the company.
 Types of ESOP
• ESOs – Granting employee the option to acquire the
shares of the company at a predetermine price
• ESPS – Shares are directly allocated at the time of a
public issue (may be at a discounted price)
• SARs – Shares are allotted and employee is free to
exercise his option after vesting period. He can sell
them after locking period.(Cashless transaction for
employee)
• Sweat Equity – Shares issued for a consideration other
than cash
RULES AND REGULATIONS

COMPANIES ACT: Approval of shareholders, not

applicable to private companies.

INCOME TAX ISSUES:

For employees:

For the company:

 Example
• A certain company grants an ESOP of 200 shares to a key
executive on 1-1-2010. The vesting period is 2 years. This
means that the employee cannot acquire those shares till 1-1-
2012 at a pre determined price.

• Vesting Period: means that period of time after the grant of the
option during which the employee cannot
exercise the option by applying for the shares.
 ESOPs AT INFOSYS
• When employees join they are offered say 100 shares at the current
price in the market
• Even after 2 yrs, the employees can buy the shares at the same rate.
• In the 1st year, employees can’t buy any shares, in the 2nd year
he/she can buy 30 shares and then in the 3rd year, he/she can buy the
remaining no.of shares.
• No. of shares allotted is fixed for employees at different levels for

• Software engineers – 100 shares

• Program Analysts – 250 shares
ESOPs – TAX IMPLICATIONS
 The government has made ESOPs taxable.

 Previously, stock options were taxed at the time of exercise of the

option by the employee.

 But since 2000-2001, ESOPs are taxable only at the time of selling
of stocks.

 At the time of sale of the security by the employee, the difference

between sale consideration and cost of acquisition (defined as fair
market value of these options) would be taxed as "capital gain". 

 Can ESOPs be Gifted ????

 AN EXAMPLE

IES CORPORATE HOUSE

MR. X MR. Y

ESOPS Sells @ 500/-

12/2/2011
12.2.2010 @ 100/
[Exercise Price]

12.2.2010 @ 200 Sale price Cost of Taxed as

[Market Value] acquisition Capital Gains
500/-
100/- i.e. Tax on
Rs. 400/-
 TAX IMPLICATION

Mr. X Mr. Y Mr. Z

Gifts Sells @ 800/-

12.2.11 12.2.12
Market Price Cost of acquisition
300/- Sale Price Fair market value
100/-
on the date of the gift

Taxed: 300 – 100 = 200/- Taxed: 800 – 300 = 500/-

ESOP in India
 How does ESOP work?
• The ESOP operates through a trust, setup by the company that accepts tax
deductible contributions from the company to purchase company stock.

• The amount of stock each individual receives may vary according to

pre-established formulas based on salary, service, or position.

• The employees may cash out after vesting in the program or when
they leave the company.

• When an ESOP employee who has atleast ten years of participation

in the ESOP reaches age 55, he or she is given the option of
diversifying his/her ESOP account up to 25% of the value. At the
age 60, the employee has option to diversify up to 50%
 Advantages to Companies
• It is considered that having a stake in the
company would increase loyalty and motivation
substantially.
• Potential employees can be attracted by a good
ESOP Package.
• Company reduces it's tax liability.
• It is proven to be one of the best employee
retention tools.
 Advantages to Employees
• Better Tax Exemptions compared to other benefit
plans.
• Long Term Wealth Creation.
• Increased morale and loyalty.
• Better employee-employer
relations
• Sense Of Job Security.
• Incentive Based Retirement.
• Sense of Company ownership due to ESOP
 Disadvantages
• Stock Performance
• Liquidity
• Dilution
• Fiduciary Liability