ESOP means Employee Stock Ownership Plan, which is a good benefit plan
for the employees. It allows the employees to become partial owners in
the company for which they work. Under ESOP policy, the business
encourages its employees to purchase shares of ownership at the
predetermined rate. The ESOP policy is frequently offered by employers
to encourage long-term loyalty from their employees in the workforce.
It further encourages the employees to contribute better work towards
the company for a long period of time with great devotion and
Eligibility for ESOP Policy
The companies offer ESOP policy to full-time employees as in some
cases part-time employees may not be eligible. However it totally
depends on the company's policies. Independent consultants or
contractors are typically not eligible for ESOP policy
ESOP policy requires minimum working hours for eligibility. The
employees may be required to work for the minimum number of hours
per week or month under the Employee stock ownership plan.
The minimum age of an employee to be eligible for an ESOP Policy is
21. Moreover, employees become eligible for ESOP policy at the time
of joining the company. An employer can restrict eligibility to
employees with two years of service depending upon the company
Is ESOP Policy beneficial for Employees?
A company offers the ESOP policy as a form of motivation to the
employees because they would work hard to gain profit for the company.
Although the main benefit for ESOP are mentioned as follows:
ESOP policy gives the ownership to the employees in the company they
work for. By owning company stock, employees have a direct stake in
the company's success which can develop a sense of loyalty and
commitment among the employees.
The employees who participate in the ESOP policy can potentially be
benefited financially as the company's stock value grows. The value of
the employee's allocated shares can increase when the company performs
well that will lead to capital appreciation as well. Additionally,
employees can receive dividends on the shares, providing them with
ESOP policy can offer tax benefits for employees. The employees have
an opportunity to defer taxes on the shares allocated to them until
they sell those shares. This further gives tax savings and allows for
tax deferral which potentially maximizes the value of ESOP benefits.
Over a period of time the employees accumulate shares through the ESOP
policy, the value of those shares can grow, potentially becoming a
valuable source of income for retirement. When employees retire, they
can sell their vested shares back to the company or in the open
market, providing a source of funds to support their retirement.
ESOP policy is used to retain and attract talented employees which
also enhance job security and career opportunities. When employees
have a direct stake in the company's success, they get more motivated
to contribute to the company's growth and profitability. It further
leads to improved company performance which can be beneficial for both
employees and for the company.
How Does an Employee Stock Option Plan Work?
The company grants eligible employees the right to purchase a specific
number of shares at a predetermined price, known as the exercise price
or strike price. Then the vesting term comes into question. The ESOP
policy includes a vesting schedule that specifies the time period of
an employee in the company. Once the options have vested, employees
have rights to exercise their options within a predetermined exercise
period. The exercise period can vary, typically it is several years.
The exercise price is typically set at the fair market value of the
company's stock at the time the options were granted at a discounted
price. Now, the employees as the shareholders of the company hold the
purchased shares. Generally, employees have to face tax consequences
when they exercise their options or when they sell the shares.
To whom, ESOP is issued?
The issuance of ESOPs in India is governed by various regulations,
including the Companies Act, 2013, and the Securities and Exchange
Board of India (Share Based Employee Benefits) Regulations, 2014.
ESOPs can be issued to all permanent employees of the company. This
includes employees who are working in India or abroad. The company
can also issue ESOPs to its directors, but not to independent
ESOPs can also be issued to employees of the company's subsidiaries
or holding companies. However, the employees of the subsidiary or
holding company must meet the eligibility criteria specified in the
ESOPs can be issued to employees who are also members of the
promoter group, provided that they are not promoters themselves