What is an Employee Stock Option Plan (ESOP)?

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What is an Employee Stock Option Plan (ESOP)? Blog Image


A parliamentary panel recently recommended to the government to amend the Income Tax Act to ensure that ESOPs (Employee Stock Option Plan) are taxed only at the time of sale of shares and not on notional gains to allow startups to hire ‘low-cost’ employees.

About Employee Stock Option Plan (ESOP)


  • Employee Stock Option Plan - which is also called Employee Stock Ownership Plan in India is a benefit plan that offers employees the right to buy company shares at a predetermined price.
  • Purpose:
    • It's a tool companies use to attract, retain, and reward employees
    • ESOPs help to align employees' interests with the company's growth and success.
  • Granting of Options:
    • Under an ESOP, eligible employees are granted the right, but not the obligation, to purchase company shares at a predetermined price, known as the "exercise price" or "strike price."
    • This price is typically set at a discount to the current market price of the company's shares.
    • Employees have to wait for a certain time period – known as the vesting periodbefore they can exercise the right to purchase those specified number of shares. 
  • All companies other than listed companies should issue it in accordance with the provisions of the Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014.
  • In the case of listed companies, they should issue in accordance with the Securities and Exchange Board of India Employee Stock Option Scheme Guidelines.
    • To Whom Can The ESOP Be Issued? Rule 12(1) of Companies (Share Capital and Debentures) Rules, 2014 states that ESOP can be issued to the following employees-
    • A permanent employee of the company who is working in India or outside India.
    • A Director of the company, including a whole-time or part-time director but not an independent director.
    • A permanent employee or director of a subsidiary company in India or outside India, or holding company, or an associate company.
  • A company cannot issue ESOP to the following employees-
    • An employee who belongs to the promoter group or is a promoter of the company.
    • A director who either himself or through any body corporate or through his relative holds more than ten per cent of the outstanding equity shares of the company, whether directly or indirectly.
    • However, the above two conditions do not apply to Startup Companies for a period of ten years from the date of its incorporation.


Q1) What is Equity Security?

An equity security, often referred to simply as "equity," represents ownership in a company or corporation. When you hold equity in a company, you are considered a shareholder, which means you have a partial ownership stake in that company. Equity securities are a type of financial instrument that allow individuals, institutions, and investors to invest in and participate in the success (or failure) of a company.

Source: Startups: MPs’panel for making ESOPs non-taxable till sold