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Group Members
y Adit Dave y Bharat Jain y Nishant Bakliwal y Karan Barot y Pratik Sharma y Vinayak Bhasin

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. or at a preferential price (price lower than the current market price).What is an ESOP? y An Employee Stock Option Plan is when the company offers its shares to the employees. This could either be at the market price (price of the share currently listed on the stock exchange). y An ESOP is nothing but an option to buy the company's share at a certain price.

an ESOP is given to y The main purpose of an . an employee. ESOP is to reward and motivate employees y Usually. or receive them through an ESOP.Introduction y Employees can receive stocks and shares of their company through a bonus. buy them directly from the company. rather than purchased by an employee.

y It is basically used as an employee retention tool to keep the top bracket management and executives in the company.Introduction y ESOP has gained momentum in India in the last few decades especially with the media and retail sectors y Companies reward their top bracket management and executives with ESOPs. .

. y The employee should belong to the "must retain" category.General Eligibility y The concerned employee must have completed a year working for the company. y The employee should hold a key position in the company. y The employee must show company loyalty and have positive performance appraisals.

.General Eligibility y 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 y The management committee will reward ESOPs only to those who have handled a lot of responsibilities in the functioning of the company.

Exactly why a E loyer has to resort to a ES for employee efficie cy. .

. The vesting period is 2 years. y Vesting Period: means that period of time after the grant of the option during hich the employee cannot exercise the option by applying for the shares.Example y A certain company grants an ESOP of 200 shares to a key executive on 1-1-2010. This means that the employee cannot acquire those shares till 1-1-2012 at a pre determined price.

(Cashless transaction for employee) y Sweat Equity Shares issued for a consideration other than cash .Types of ESOP y ESOs Granting employee the option to acquire the shares of the company at a predetermine price y ESPS Shares are directly allocated at the time of a public issue (may be at a discounted price) y SARs Shares are allotted and employee is free to exercise his option after vesting period. He can sell them after locking period.

The trust then transfers them further to individual employees in the pre-decided distribution share. depending upon the number of Options to be given to the employees (as decided by the Compensation committee of the company).Types of implementation of ESOP y Trust: The company would form a trust to administer the ESOP. y Direct: Company issues shares or warrants directly to the employees under the Guidelines of SEBI. It will have to issue shares or options to the trust. .

The Process Of an ESOP. Identify the need to introduce ESOPs Feasibility of offering ESOPs Design structure for ESOPs Obtain funding &Work on the terms and conditions Decide the eligibility criteria for the scheme Communicate to the employees Implementation of ESOPs .

you do not invest in the market. y Companies offer their employees shares because it is considered that having a stake in the company would increase loyalty and motivation substantially. You invest in the equity shares of a company.Advantages to Companies y When you invest in shares. That makes you a shareholder or part owner in the company. y It is proven to be one of the best employee retention tools. y Potential employees can be attracted by a good ESOP Package. .

Advantages to Employees y Better Tax Exemptions compared to other benefit y y y y y plans. Increased morale and loyalty. Better employee-employer relations Sense Of Job Security. Long Term Wealth Creation. Sense of Company ownership due to ESOP .

. y Effect on morale and retention if the share price falls y High costs :short-term costs of drawing up and getting a scheme approved.Disadvantages. y Long-term costs of managing the scheme and keeping records. y Dilution of share ownership .As more shares are issued each share the owners have become a smaller percentage of the company which might lead to excessive dilution in share ownership and a decrease in Earning Per Share.

5 times as profitable as comparable conventionally owned companies. Merck.000 companies. Chase Manhattan. including big companies such as United Air Lines. and Starbucks. Bank of America. . PepsiCo. y Statistics show that companies with Employee Stock Ownership Plans are 1. y Today there are over 11. who have ESOP putting about $1 trillion in equity into the hands of approximately 17 million employees.Success OF ESOP y In 1986 there were approximately 8000 companies which had ESOPs with equity into the hands of approximately 11 million employees. Bristol-Myers Squibb.

ESOP In India y Has grown at a steady rate in recent times. y Is Divided into The IT Sector companies and the Non- IT Sector Companies with the IT Sector much more involved in ESOPs .

A Comparison IT SECTOR COMPANIES y 43% of IT Companies give ESOPs to Employees.ESOP In India. y 58% follow the Direct Route with the rest following the Trust Route y 40-45% companies grant ESOPs every year. y More than 75% of companies offer ESOPs only to the top management and seniors. y Almost 75% of the Companies follow a direct route for providing ESOPs y Around 60% companies grant ESOPs every year to employees. . NON IT SECTOR y Only 17% of the companies do so. y The IT Industry gives ESOPs to new employees in a bid to lure them to their company.

ESOP in India Top Management Commitment ESOP Used India for Employee Retention On Informal Basis Compensation Through Trust Other Indirect Methods .

.The Tax Scenario y The ESOP is not taxed on acquiring the shares. y You are taxed on the profit you make when you sell the shares or gift them.

99% of the benefit Sale Difference between the net sales proceeds and the exercise price taxable as µCapital Gains¶ In case of share of an Indian company listed on recognized stock exchange in India (Securities Transaction Tax (³STT´) paid) Long term capital gain ± 0% tax Short term capital gain ± taxable @ 10% Difference between the net sales proceeds and the fair market value as on vesting date taxable as µCapital Gains¶ If share of a listed Indian company (STT paid) Long term capital gain ± 0% tax Short term capital gain ± taxable @ 10% .Implications Of the 2007 Tax Changes Event Grant Pre Finance Act 2007 ± (Qualified Plan) Not a taxable event Post Finance Act 2007 Not a taxable event Exercise (transfer or allotment of shares) Not a taxable event Taxable event FBT Employer pays FBT @ 33. cost to employee ± 33.99% on the difference between fair market value as on the vesting date and the exercise price If FBT recovered from the employee.

banker for implementation y Accounts of the company are prepared as if company is administrating ESOP .SEBI Guidelines y Redefine market price as the latest available closing price prior to the date on which auctions are granted y Consider the exchange on which there is highest trading volume y Appoint a registered merchant.

are underwater. Most of the Options issued at market prices. y The recent meltdown in the stock markets has had a devastating impact on the value of stock options . since you will need fewer shares to give the same amount of benefit. twelve to fifteen months ago. The shareholders can do with lower dilution. most appropriate time to grant ESOPs is when the markets have hit the bottom. . The option holders get shares at lowest possible price.ESOP in the meltdo n. y Quite contrary to the popular belief. with no downside risk and higher potential upside.