What is ESOP?
ESOP (Employee Stock Option Plan) is a scheme under which a company grants employees the right to purchase shares at a predetermined price after a specified vesting period, subject to terms and conditions.
Who Can Issue ESOP?
A company can issue ESOPs if it:
- Is incorporated under the Companies Act
- Has provisions for ESOP in its Articles of Association (AOA)
- Is a startup or private limited company
- Is not a listed public company (separate SEBI rules apply)
Eligible Employees for ESOP
ESOPs can be issued to:
- Permanent employees of the company
- Directors (excluding independent directors)
- Employees or directors of holding/subsidiary companies
Not Eligible:
- Promoters holding more than 10% equity (unless DPIIT-recognized startup)
- Independent directors
Step-by-Step Process to Issue ESOP to Employees
Step 1: Check and Amend Articles of Association (AOA)
Ensure that the AOA authorizes the issuance of ESOPs.
If not, amend the AOA through a special resolution before proceeding.
Step 2: Draft ESOP Scheme
Prepare a detailed ESOP scheme covering:
- Total number of options
- Eligibility criteria
- Vesting period and schedule
- Exercise price
- Lock-in period (if any)
- Exit and termination clauses
Step 3: Convene Board Meeting
Hold a Board Meeting to:
- Approve the ESOP scheme
- Fix the number of options
- Decide exercise price and vesting terms
- Approve calling of Extraordinary General Meeting (EGM)
Step 4: Shareholder Approval (EGM)
Pass a Special Resolution in EGM approving:
- ESOP scheme
- Total number of options
- Class of employees eligible
- Pricing and vesting terms
Step 5: File MGT-14 with ROC
File Form MGT-14 within 30 days of passing the special resolution along with:
- Certified shareholder resolution
- Explanatory statement
- ESOP scheme document
Step 6: Grant of ESOP to Employees
After approval:
- Issue grant letters to eligible employees
- Maintain ESOP grant register
- Obtain employee acceptance
Step 7: Vesting of ESOP
- Minimum 1-year vesting period is mandatory
- Vesting can be performance-based or time-based
- Vesting schedule must follow the approved scheme
Step 8: Exercise of ESOP
Once vested, employees can:
- Exercise options by paying the exercise price
- Shares are allotted after exercise
Board approval is required for share allotment.
Step 9: Allotment of Shares & ROC Filing
- Issue shares upon exercise
- File PAS-3 (Return of Allotment) with ROC within 30 days
- Issue share certificates to employees
Limits on ESOP Issuance for Startups
For DPIIT-recognized startups:
- ESOPs can be issued to promoters holding more than 10%
- No upper cap prescribed under Companies Act
- Allowed for up to 10 years from incorporation
Taxation of ESOPs
At Exercise Stage
- Taxed as perquisite income
- Difference between FMV and exercise price is taxable
- TDS applicable
At Sale Stage
- Capital gains tax applicable
- Holding period determines short-term or long-term gains
Key Compliance Requirements
- Maintain ESOP Register
- Proper disclosure in Directors’ Report
- Accurate valuation by registered valuer
- Timely ROC filings
Common Mistakes to Avoid
- Issuing ESOP without AOA authorization
- Missing shareholder approval
- Improper valuation
- Non-compliance with vesting rules
- Ignoring employee tax impact
Why Choose Saving Mantra?
Saving Mantra offers end-to-end ESOP structuring and compliance, including:
- ESOP scheme drafting
- Valuation coordination
- ROC filings
- Startup advisory
- Employee tax planning support
Disclaimer
This blog is for informational purposes only and does not constitute legal, tax, or financial advice. Laws and regulations may change, and applicability depends on specific circumstances. Readers are advised to consult Saving Mantra professionals before implementing any ESOP plan.