How to Buy ESOP Shares ?

How to Buy ESOP Shares ?

Employee Stock Ownership Plan or Employee Stock Option Plan, commonly abbreviated as ESOP, is widely used by private institutions to attract employees for a longer duration in their company. It is a model of a scheme that benefits both the employer and the employee. It can also be described as a mode of encouragement and motivation to the employees who can show their loyalty to the company's growth. 

There are no obligations attached to buying ESOP shares while the employees issue their grants. The employees would have the right to purchase the company's shares after a certain period of time, and they would be able to sell their shares after some years. Selling the company's share earlier would lead them to pay the tax. 

Benefits of Esop to the Employees:

  1. It is a cashless initiative- When a company is unable to pay its workers, it can issue an ESOP without paying them.
  2. It encourages the employees.
  3. It helps in retaining the employees for a longer duration.

Benefits of Esop to the Employers:

  1. The employer gets the share in profit- With the retainment of efficient employees, the company value increases, increasing share values.
  2. Ownership- ESOP is taxable when the employees exercise the option and convert the options into shares and when the employee sells his shares.

One might think about how to buy ESOP shares in a private company. But it would be easy if one undergoes the following 2 periods assigned by a company.

After completing a certain period of time in a company, an employee becomes eligible as a shareholder of the company.

  • Vesting period- An employee has to be in agreement to stay in the company until he receives the shares. This period is known as the vesting period. If for some reason, they decide to leave the company within this period, then they do not get any shares.
  • Exercise period- Once the vesting period of an employee is completed, they can get their share by paying a small nominal price which is known as the exercise price. 

This is illustrated by an example below:

Suppose a company has 50 options with a vesting period of 2 years and an exercise period of 1 year. The money you need to pay for shares during the exercise period is Rs.20 instead of Rs.100, which is the actual price of the share. Then after 2 years of vesting period, an employee will pay about = 20 x 50 (options) = 1000.

This leads to the right of the employees to 50 shares of the company. 

Indian start-ups such as Paytm, Flipkart, Ola, Byju's, and others have announced 100crores inventory membership for their employees at the end of the year. The Indian start-ups are not selfish rather, they think of the welfare of their employees as the growth of their company takes place. It is for the betterment of both the employer and employees.

There would be no taxation of the shares that the employees sell if the liquidity of the company is increased, and the vesting period should be as minimum as possible.

How to Buy Esop Shares?

  • An ESOP draft is prepared following the rules laid down by the Companies Act of 2013.
  • A board meeting is scheduled to draft a resolution
  • The decision that is made in the meeting is sent to all the directors.
  • A resolution is passed for the issue of ESOP, and the price of the shares is decided, which should be less than the actual market price.
  • This notice is then sent to all the company's members, including directors, auditors and shareholders.
  • The options would be sent to the employees and directors of the companies to purchase shares through ESOP.

In this manner, an employee would be granted the shares through ESOP. 

An employee is eligible to issue shares through ESOP if:

  1. The employee fulfills all the criteria involved in the protocols for the EOSP scheme.
  2. He should complete the vesting term requirement.

iii. He should follow the accounting rules.

  1. It is done based on years of service by the employee at a pre-defined price.

Before an employee buys a share of the company, he has to undergo the vesting period. Vesting indirectly increases the right of the employee on their shares.

The employee can exercise the share after they have completed the vesting term. After completing, the employee will have the right to sell their shares in the open market. It is not advised to sell the shares as soon as one gets them; rather, they should take time. After selling the shares, the employees have to pay the taxes. The tax can be on short-term or long-term capital gains based on the years after which they sell the company's stocks.

Pros of Esop:

  • Employees can make grand profits.
  • They can enjoy a share of the company's profit alongside the founders.
  • They can get the shares at a nominal price.

ESOP is the current prevalent method or scheme which is used by various private companies, including India and other countries. It is depicted that the ESOP scheme will change the dynamics of the Indian economy and eradicate the unemployment prevailing in the country.

Disclaimer: It is always suggested to take the advice of experts before moving into a conclusive decision. You can contact us for more information.

If you are looking for any Employee stock option plan ESOP services or consultants in Noida, Delhi, Gurgaon or anywhere in India, write to us at accounts@especia.co.in. Or Call On :(+91)-9711021268 +91-9310165114

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