ESOP IMPLEMENTATION SCHEME

The Employee Stock Option Plan (ESOP) or Employee Stock Ownership Plan is a benefit scheme designed for employees to acquire shares in the company. These shares are typically purchased by employees at a price below the market rate, effectively providing them with a discounted price.

In essence, an ESOP is a benefit plan that grants employees ownership interest in the company through shares or stock. It's important to note that participation in an ESOP is optional and not obligatory. Employees have the choice to accept or decline this option based on their preference.

These plans are often awarded to existing employees as a reward for their tenure or based on their performance. The primary objective of providing ESOPs is to foster greater employee commitment to the company and to aid in employee retention. Essentially, ESOPs incentivize employees to remain committed to the company for the long term and to take on a sense of ownership.

To avail themselves of the benefits of an ESOP, eligible employees must fulfill a specified period with the company, known as the vesting period. Upon completion of the vesting period, employees become eligible to purchase a predetermined number of shares of the company at a predetermined price. Typically, the vesting period lasts for one year from the date of issuance or grant of options.

Here are the meanings of some specific terms used in ESOPs:

>?Option: This refers to the right given to an employee to purchase or subscribe to shares offered by the company at a predetermined price in the future.

>?Employee Stock Option: According to Clause (b) of Sub-Section (1) of Section 62 of the Companies Act, 2013, a company can offer shares through employee stock options to its employees if shareholders approve such a scheme via a special resolution.

>?Option Grantee: This refers to an employee who has the right (but not the obligation) to exercise an option under an Employee Stock Option Scheme (ESOS).

>?Vesting Period: The ESOP vesting period is the timeframe between when employees receive their ESOPs and when they are able to exercise any associated rights to options or shares. Employees can only obtain these shares once the ESOP vesting period has been completed.

>?Exercise Period: This is the timeframe that begins after the completion of the vesting period, during which an employee can exercise their right to apply for shares against the vested options as per the approved ESOP scheme.

>?Exercise Price: This refers to the price payable by an employee to exercise the options granted under the ESOP scheme.

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Benefits of Employee Stock Option Plans (ESOPs):

>?Enhances Company Productivity: ESOPs can boost productivity within the company.

>?Attracts Fresh Talent: ESOPs are attractive to new talent seeking employment opportunities.

>?Promotes Employee Retention: ESOPs encourage employees to stay with the company for the long term.

>?Fosters Sense of Ownership: ESOPs instill a sense of ownership among employees.

>?Enhances Company Image: Offering ESOPs can improve the public image of the company.

>?Motivates Employees: ESOPs serve as a motivational tool for employees to excel in their roles.

>?Strengthens Employee Relationships: ESOPs contribute to maintaining lasting relationships between the organization and its employees.

>?Increases Employee Loyalty: ESOPs cultivate loyalty among employees.

>?Provides Job Security and Satisfaction: ESOPs offer a sense of job security and satisfaction to employees.

>?Facilitates Wealth Creation: ESOPs help employees create wealth over time.

>?Builds a Motivated Workforce: ESOPs contribute to building a motivated and committed workforce.

>?Benefits Company Secretaries: ESOPs offer a special benefit to the Secretarial department by ensuring that employees, as shareholders, aid in meeting quorum requirements for Annual General Meetings (AGMs) and Extraordinary General Meetings (EGMs) as per the Companies Act, 2013

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Applicability of Laws to Issuing Shares under Employee Stock Option (ESOP) Programs:

1.??????Companies Act, 2013:

2.??????SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021:

These regulations stipulate the guidelines and procedures concerning the issuance of shares through ESOPs. They provide detailed requirements regarding the implementation and operation of ESOPs by companies.

3.??????SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:

These regulations apply to listed companies and mandate certain disclosures and obligations related to ESOPs. They ensure transparency and accountability in the issuance and management of shares under ESOPs by listed entities.

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PROVISIONS OF COMPANIES ACT, 2013:-

Section 62(1) (b) of the Companies Act, 2013 outlines the provisions regarding the issuance of further shares by a company with a share capital. According to this section:

> Offer to Employees: When a company intends to increase its subscribed capital by issuing additional shares, it must offer such shares to its employees under a scheme of employees' stock option.

>????Special Resolution: The offer of shares to employees must be approved by a special resolution passed by the company. This means that a resolution must be passed by a majority of not less than three-fourths of the members who are present and voting at the meeting.

>?????Prescribed Conditions: The offer of shares to employees under the scheme of employees' stock option is subject to certain conditions as prescribed by the government. These conditions are specified in Rule 12 of The Companies (Share Capital and Debentures) Rules, 2014.

>?????In summary, Section 62(1)(b) mandates that companies follow specific procedures, including obtaining shareholder approval through a special resolution and adhering to prescribed conditions, when offering shares to employees under an employee stock option scheme.

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Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, specifies that for a company, excluding listed companies, to offer shares under an ESOP, it must adhere to the following requirements:

>??????Approval by Shareholders: The ESOP scheme must be approved by shareholders through a special resolution.

>????Definition of "Employee": The term "Employee" includes permanent employees, directors, or employees of subsidiaries or holding companies. However, it excludes promoters or individuals holding more than ten percent of the company's outstanding equity shares either directly or indirectly.

>????Restrictions on Shareholder Rights: Until shares are issued upon the exercise of options, employees granted ESOPs do not possess rights such as receiving dividends, voting, or enjoying other shareholder benefits.

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Rule 16 of The Companies (Share Capital and Debentures) Rules, 2014, further stipulates conditions regarding the purchase or subscription of shares by trustees for the benefit of employees:

>??????Approval by Members: Any provision of money for the purchase or subscription of shares must be approved by members through a special resolution in a general meeting.

>????Method of Purchase: Share purchases must be conducted through a recognized stock exchange if the company's shares are listed.

>?????Valuation: Shares' valuation must be determined by a registered valuer if the company's shares are not listed on a recognized stock exchange.

>????Limitation on Value: The value of shares to be purchased, along with the money provided by the company, should not exceed five percent of the aggregate of paid-up capital and free reserves of the company.

Additionally, Rule 16 outlines disclosure requirements in the explanatory statement of the general meeting, conditions for trustee appointment, and disclosure obligations by the Board of Directors in the company's annual report concerning voting rights exercise.

Additionally, the explanatory statement accompanying the notice of the general meeting must include details such as the class of employees benefiting from the scheme, particulars of trustees or employees receiving shares, details of the trust, interests of key personnel or promoters, benefits accruing to employees, and specifics regarding voting rights exercise.

Moreover, certain individuals are restricted from being appointed as trustees, including directors, key managerial personnel, promoters, or their relatives, and those holding ten percent or more of the paid-up share capital of the company.

Lastly, if employees do not directly exercise their voting rights, the Board of Directors is required to disclose relevant details in the company's annual report, including the names of employees not exercising voting rights, reasons for non-voting, details of the person exercising voting rights, shares held by employees, dates of general meetings, resolutions voted on, voting percentages, and the outcome of the votes.

LISTING REGULATIONS - SEBI (SHARE BASED EMPLOYEE BENEFIT & SWEAT EQUITY) REGULATIONS, 2021

The SEBI (Share Based Employee Benefit & Sweat Equity) Regulations, 2021 provide guidelines for employee stock option schemes (ESOS). Here are some key points from these regulations:

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>??????Definition of ESOS: Under Regulation 2(1) (J), an ESOS is defined as a scheme in which a company grants stock options to its employees directly or through a trust. This definition clarifies that a Listed Company can implement the ESOS scheme either directly or by establishing an irrevocable trust. However, if the scheme is to be executed through a trust, this decision must be made upfront at the time of seeking approval from shareholders for setting up the scheme

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>????Implementation Options: A listed company can implement an ESOS either directly or through an irrevocable trust. The decision to use a trust must be made upfront when seeking approval from shareholders.

>????Use of Single Trust: A company may implement multiple schemes permitted under these regulations through a single trust. However, the trust must maintain proper books of account and records for each scheme to provide a clear view of its financial position.

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>????Eligibility Criteria for Employees: Employees eligible for ESOPs include those exclusively working in India or outside India, directors of the company (including non-executive directors who are not promoters), and employees of group companies or holding companies. Probationary employees and those on fixed-term contracts are also eligible.

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>????Ineligibility Criteria for Employees/Directors: Promoters or members of the promoter group, directors holding more than 10% of the company's paid-up share capital, and their relatives or related entities are ineligible for ESOPs.

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>????Exemption for Start-ups: Start-up companies, as defined by the Department of Industrial Policy and Promotion, may be exempt from certain eligibility criteria for ESOPs for up to five years from their date of incorporation or registration.

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These regulations provide a framework for the implementation of ESOS in listed companies, ensuring transparency and accountability in the issuance of stock options to employees.

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Under regulation 3(2) of SEBI (Share Based Employee Benefits & Sweat Equity) Regulations, 2021, a company is allowed to implement multiple schemes permitted under these regulations through a single trust. However, it's essential for such a single trust to maintain accurate records for each scheme, reflecting its transactions and financial status, ensuring transparency and accountability.

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Employees Eligible for ESOP:

Employees eligible for ESOP include:

>??????Employees designated by the company, exclusively working in India or outside India.

>????Directors of the company, including both whole-time and non-whole-time directors, except Independent Directors.

>????Employees of group companies, subsidiaries, or associate companies, as defined in the regulation, excluding those belonging to the promoter group or holding more than ten percent of the outstanding equity shares of the company.

>?????Note: Employees on probation and those on fixed-term contracts, such as 3 or 4 years, are also eligible for ESOP if they are on the company's payroll.

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Employees/Directors Ineligible for ESOP:

The following individuals are ineligible for ESOP:

>?????Employees or Directors belonging to the promoter or promoter group.

>????Directors holding more than 10% of the paid-up share capital of the company, either individually or together with their relatives or a body corporate.

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Exemption for Start-ups:

In the case of Start-up Companies, as defined in notification number GSR 180(E) dated 17th February 2016 by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, certain conditions mentioned above do not apply for up to five years from the date of incorporation or registration.

WAYS TO ISSUE SHARES UNDER ESOP

There are two primary methods for issuing and allotting shares to employees under an Employee Stock Option Plan (ESOP):

1.??????Direct Route:

In this approach, the company directly issues stock options under the ESOP to eligible employees. After the vesting period, employees can exercise their options, and the company allocates shares to them. This route typically involves the issuance of fresh shares, thereby making employees shareholders of the company.

2.??????Trust Route:

Under the trust route, a separate entity known as an employee welfare trust is established. This trust holds shares in a fiduciary capacity for employees. When an employee exercises their option, the trust transfers the shares to the respective employee. It's worth noting that companies can transition between the direct and trust routes if desired.

Points to Consider for the Trust Route:

>??????The trust route allows for the acquisition of existing shares as well as the issuance of fresh shares.

>?????If the trust acquires shares from the secondary market, there are limits on the acquisition: 2% of paid-up equity capital per financial year and an overall limit of 5% of paid-up equity capital at any given time.

>????Shares acquired directly from the company by the trust do not have acquisition limits.

>????Shares held by the trust should be reflected under the non-promoter, non-public category in the shareholding pattern.

>????If the ESOP scheme concludes, and the trust still holds shares, these surplus shares may be used for another scheme with shareholder approval or sold, with the proceeds utilized as per the options outlined in the trust deed.

>????Section 67 permits companies to provide loans for the purchase of their own shares for ESOP purposes.

>?????If the trust borrows funds from the company to acquire shares from the secondary market, the loan is repaid using the proceeds received from employees' exercised prices.

>??????Shares acquired by the trust are categorized under the non-promoter, non-public category in the shareholding pattern. Trustees do not possess voting rights for the shares held by the trust on behalf of employees.

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FEMA ASPECTS OF ESOP

When a company offers ESOPs to its foreign employees, it must comply with the Foreign Exchange Management Act (FEMA) of 1999.

Under FEMA regulations:

Treatment of Investment: Investments received from foreign employees through ESOPs are treated as Foreign Direct Investment (FDI).

Compliance with Entry Routes: Any investment made by foreign employees is subject to entry routes (Automatic or Approval route), sectoral caps, investment limits, and pricing guidelines.

Approval Route: Approval from the Reserve Bank of India (RBI) is mandatory before granting ESOPs to foreign employees.

Automatic Route: No approval is required.

Note: If an Indian holding company issues ESOPs to employees of its foreign subsidiary, who are working in border-sharing countries such as Pakistan, Bhutan, China, Taiwan, Nepal, Macao, Hong Kong, Myanmar, etc., approval from the RBI is mandatory.

?Forms to be Filed:

These filings ensure compliance with FEMA regulations governing ESOPs granted to foreign employees and help in the proper reporting of such transactions to the regulatory authorities.

>??????ESOP Reporting Form: At the time of granting options, the issuer needs to file Form ESOP Reporting Form with the RBI.

>????Form FCGPR: At the time of issuing and allotting Capital Instruments, Form FCGPR shall be filed.

ISSUE OF ESOP

Before implementing an Employee Stock Option Plan (ESOP), it's essential to ensure that the company's Articles of Association (AoA) authorize the issuance of shares through ESOP. If the AoA does not include such provisions, the company should convene an extraordinary general meeting to amend its Articles accordingly. Once the Articles are amended, the company can proceed with holding a Board Meeting to pass the resolution and obtain shareholder approval for the ESOP Scheme.

For Private and Unlisted Companies, the issuance of Employee Stock Option Plans (ESOP) is governed by Section 62(1)(b) of the Companies Act, 2013, and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.

Listed Companies, on the other hand, must adhere to compliance requirements outlined in the Companies Act, 2013, SEBI (Share Based Employee Benefit & Sweat Equity) Regulations, 2021, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and related rules. These regulations provide detailed guidelines for the implementation of ESOPs in listed entities, ensuring transparency and accountability in the process

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THE PROCESS FOR ISSUING EMPLOYEE STOCK OPTIONS BY A COMPANY IS AS FOLLOWS:

*?Nomination & Remuneration Committee (if applicable) identifies eligible employees and Directors for ESOPs and determines eligibility criteria. NRC committee approval is required, and the Board may authorize NRC to act as the Compensation Committee for ESOPs.

*?Prepare the draft scheme of Employee Stock Option Plan (ESOP) and obtain a valuation report from a Chartered Accountant or SEBI registered merchant banker. Private and Unlisted Companies comply with the Companies Act, 2013, while Listed Companies comply with the Companies Act, 2013, SEBI (Share Based Employee Benefit & Sweat Equity) Regulations, 2021, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and related rules.

*?Prepare the notice for the Board Meeting, along with the draft resolution, and send it to each Director at least 7 days in advance.

*?In the case of a Listed Company, provide intimation to the Stock Exchange(s) at least two days in advance about the Board meeting discussing the ESOP scheme.

*?Pass the Board resolution to approve the issuance of shares through ESOP, approve the draft scheme, and valuation report determining the share price.

*?Fix the time, date, and venue to convene the Extraordinary General Meeting to pass the Special Resolution for issuing ESOP.

*?Provide the outcome of the Board meeting to the Stock Exchange(s) within 30 minutes of its conclusion.

*?Employees can exercise their option and purchase shares after the vesting date at a predetermined price, usually less than the share’s Fair Market Value (FMV). The difference between the FMV and the exercise price is considered a perquisite taxed at the employee’s income tax slab rate.

*?Send the draft minutes of the Board Meeting to all Directors within fifteen days and file Form MGT-14 with the Registrar of Companies for the resolutions passed.

*?In the case of a Listed Company, obtain a certificate from a Merchant Banker ensuring ESOP scheme compliance with SEBI guidelines.

*?Send notice of the General Meeting, along with the explanatory statement, to all directors, auditors, shareholders, and secretarial auditors at least twenty-one days n advance by post or electronic means. If sent by post, the notice should be sent 48 hours earlier, excluding the day of sending and the day of the meeting (e.g., 21 +2+2=25 days in advance).

*?Convene General Meeting and pass Special Resolution for ESOP issuance. Specified IFSC Public Companies may use ordinary resolution

*?Pass separate Special Resolution if any employee holds up to 1% of paid-up Share Capital and still wants ESOP.

*?Notify outcome of General Meeting to Stock Exchange(s) within 12 hours.(if applicable)

*?Disclose voting results with scrutinizer’s report to Stock Exchange(s) within 48 hours.

*?Apply for In-Principle approval from Stock Exchange(s) for ESOP issuance (Listed Companies).

*?File Form MGT-14 with Registrar of Companies within 30 days of Special Resolution.

*?Provide two days advance intimation to Stock Exchange(s) before the General Meeting (Listed Companies).

*?Convene Board Meeting to grant options and pass resolution.

*?Notify outcome of Board Meeting to Stock Exchange(s) within 30 minutes.

*?Distribute ESOP options to eligible employees, directors, and officers.

*?Maintain 'Register of Employee Stock Options' (Form No. SH-6) recording ESOP details for employees, directors, and officers.

MAIN CONTENT/DISCLOSURE OF EXPLANATORY STATEMENT U/S 102 OF THE COMPANIES ACT, 2013, AND RULES MADE THEREUNDER:

·?????Total number of stock options to be granted.

·??????Identified classes of employees entitled to participate.

·??????Appraisal process for determining employee eligibility.

·??????Vesting requirements and period.

·??????Maximum period for vesting.

·??????Exercise price or formula for determining it.

·??????Exercise period and process.

·??????Any lock-in period.

·??????Maximum number of options per employee and in aggregate.

·??????Valuation method for options (for Listed Companies, compliance with SEBI regulations).

·??????Conditions under which options may lapse (e.g., termination for misconduct).

·??????Time period for exercising vested options in case of employment termination or resignation, ensuring compliance with accounting standards.

COMPLETION OF VESTING PERIOD AND EXERCISING OF OPTIONS:

·??????Upon completion of the vesting period, eligible employees shall exercise their options.

·??????Company convenes a Board Meeting to allot shares under the ESOP scheme to exercising employees.

·??????For convening the Board Meeting, Listed Companies provide at least two days advance intimation to Stock Exchange(s) (excluding the day of intimation and the day of meeting).

·??????Convene the Board Meeting, authorize allotment of shares, and complete the allotment process to eligible employees.

·??????Notify the outcome of the Board Meeting to Stock Exchange(s) within 30 minutes.

·??????Apply for Listing Approval of shares issued under ESOP from Stock Exchange(s). Note: ESOP Listing Approval is Listing cum Trading Approval, eliminating the need for a separate application for Trading Approval.

·??????File Form MGT-14 and PAS-3 with the Registrar of Companies within 30 days from the date of Board Resolution.

·??????If no lock-in period applies to ESOP shares, exercising employees are free to trade their shares in the market.

·??????Listed Companies obtain a Certificate from Secretarial Auditor confirming compliance with SEBI guidelines in administering the ESOP scheme.

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KEY POINTS TO KEEP IN MIND WHILE EXERCISING OPTIONS:

·??????Exercise of options by eligible employees is not considered trading.

·??????Sale of shares acquired through ESOP exercise is treated as open market trade.

·??????Designated persons can sell ESOP-acquired shares only if they have not acquired any company shares (excluding ESOP shares) within six months prior to selling.

·??????Designated persons cannot sell shares when the trading window is closed.

·??????If a Listed issuer issues shares to eligible employees through ESOP executed via a trust involving acquisition from the secondary market:

·??????The company can acquire shares up to 2% of its paid-up capital in a financial year.

The total number of shares under secondary acquisition held by the trust should not exceed certain limits as a percentage of the paid-up equity capital of the company, as specified in SEBI regulations:

* A - For the schemes enumerated in Part A, Part B or Part C of Chapter III of these regulations the limit is 5%

*B - For the schemes enumerated in Part D or Part E of Chapter III of these regulations the limit is 2%

*C - For all the schemes in aggregate the limit is 5%

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SHARE BASED EMPLOYEE BENEFIT SCHEMES UNDER SEBI (SHARE BASED EMPLOYEE BENEFIT SCHEME AND SWEAT EQUITY) REGULATIONS, 2021

1. Employee Stock Option Plan (ESOP)

2. Employee Stock Purchase Scheme (ESPS)

3. Stock Appreciation Rights Scheme (SAR)

4. General Employee Benefit Scheme (GEBS)

5. Restricted Stock Units Scheme (RUS)

6. Retirement Benefit Scheme (RBS)

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RESTRICTIONS IF COMPANY DOES NOT COMPLY

If a listed company fails to comply with the minimum public shareholding (MPS) criteria prescribed under the Securities Contracts (Regulation) Act, 1956, and intends to use ESOP as a method to reduce promoter holding, certain restrictions apply. According to a SEBI circular dated 3rd February 2023 (SEBI circular No. SEBI/HO/CFD/PoD2/P/CIR/2023/18), the allotment of shares under ESOP following the exercise of options by eligible employees is limited to 2% of the paid-up share capital of the listed entity.

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ROLE OF COMPANY SECRETARIES

The role of Company Secretaries in the implementation of an Employee Stock Option Plan (ESOP) encompasses various critical tasks, including:

·??????Determining Eligibility Criteria: Company Secretaries assist in defining the criteria for employees and board members eligible to participate in the ESOP.

·??????Conducting Due Diligence: They conduct due diligence to ensure compliance with regulatory requirements and internal policies.

·??????Scheme Preparation: Company Secretaries are responsible for drafting the ESOP scheme, considering legal, regulatory, and internal requirements.

·??????Legal Guidance: They provide legal guidance to the Board of Directors on the various legal aspects of issuing ESOPs.

·??????Record Maintenance: Company Secretaries prepare and maintain essential secretarial records related to ESOPs, such as the ESOP Scheme, ESOP Register, and meeting minutes.

·??????Regulatory Compliance: They prepare and file various e-forms with the Registrar of Companies and ensure compliance with regulatory filings.

·??????Application Preparation: Company Secretaries prepare applications for obtaining in-principle approval, listing, and trading approval from stock exchanges.

In addition to their role in implementation, Company Secretaries also play a crucial role in disclosing ESOP-related information in the Board report, including

·??????Total Number of Options Granted: Disclose the total number of options granted under the ESOP scheme.

·??????Vesting and Exercise Price Details: Provide details regarding vesting, exercise price, route of ESOPs, and the source of shares (fresh issue or acquisition from the secondary market).

·??????Scheme Changes: Disclose any material changes in the ESOP scheme during the year.

·??????Accounting Standards: Ensure disclosure in accordance with relevant accounting standards.

·??????Diluted EPS Calculation: Include information on the diluted earnings per share (EPS) considering the issue of ESOP shares.

·??????Share Valuation Method: Disclose the method used to compute the intrinsic and fair value of shares issued under the ESOP.

TAX TREATMENT AT THE TIME OF BUYING THE SHARES

At the time of purchasing shares through the exercise of Employee Stock Options (ESOPs), the tax treatment varies based on certain factors. Typically, when an employee exercises their option to buy shares at a price lower than the fair market value (FMV) of the shares, the difference between the FMV and the exercise price is considered a perquisite and taxed in the hands of the employee at their applicable income tax slab rate.

However, for employees of new businesses, the tax implications of ESOPs are somewhat mitigated. Employees at startups may not be required to pay tax on the perquisite in the year in which they exercise the ESOP. Instead, the Tax Deducted at Source (TDS) on ESOPs can be delayed until one of the following events occurs:

i. Five years from the date of the ESOP grant.

ii. When the employee sells the ESOP.

iii. Date of departure from the company.

Furthermore, when the employee sells the shares acquired through ESOPs, the tax treatment will depend on the period for which the shares were held. If the shares are sold after 12 months, any gains are treated as long-term capital gains. If the shares are sold within 12 months, the gains are considered short-term capital gains. The taxable amount is calculated based on the difference between the selling price and the FMV of the shares at the time of exercise.

It's essential for employees to understand the tax implications associated with ESOPs and consult with tax professionals or financial advisors for personalized guidance based on their specific circumstances.

When an employee sells the shares acquired through exercising their Employee Stock Options (ESOPs), the tax treatment is based on the duration for which the shares were held. Here's how it works:

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*????Long-Term Capital Gain: If the ESOP shares are sold after holding them for more than 12 months from the date of acquisition, any profit from the sale is treated as long-term capital gains. These gains are subject to taxation at a preferential rate.

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*????Short-Term Capital Gain: If the ESOP shares are sold within 12 months of their acquisition, any profit from the sale is considered short-term capital gains. These gains are taxed at the individual's applicable income tax slab rate.

Regarding the taxation of foreign ESOPs in India, similar principles apply. Any perquisites earned from a foreign company through ESOPs would be subject to taxation in India.

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Regarding the consideration of ESOPs as part of managerial remuneration, if ESOPs are offered to directors, they are treated as a perquisite. Therefore, ESOPs become part of managerial remuneration under sections 197 and 198 of the Companies Act, 2013. This means that the value of the ESOPs is included when calculating the total remuneration of the directors for regulatory purposes.

It's important for employees and directors participating in ESOPs to understand these tax implications and seek advice from tax professionals or financial advisors for personalized guidance based on their individual circumstances.

CONCLUSION

Employee Stock Option Plans (ESOPs) indeed serve as a powerful tool for companies to reward their employees, drive profitability, foster a sense of ownership, and promote employee loyalty. Through ESOPs, employees are not only incentivized to contribute to the company's success but also become shareholders, aligning their interests with those of the company.

By offering shares to eligible employees, companies can attract and retain top talent, as ESOPs provide employees with a stake in the company's performance and growth. This can lead to increased motivation, productivity, and commitment among employees.

Moreover, ESOPs contribute to a more inclusive corporate culture where employees feel valued and engaged. As shareholders, employees are more likely to actively participate in decision-making processes and contribute innovative ideas to drive the company forward.

In conclusion, ESOPs are an effective means for companies to invest in their employees, drive organizational success, and create a more dynamic and collaborative work environment. As such, they remain a valuable strategy for companies seeking to build a competitive edge in today's business landscape.

?Here are the answers to some frequently asked questions (FAQs) about Employee Stock Option Plans (ESOPs):

Q. What is an ESOP?

A. ESOP stands for Employee Stock Option Plan. It's a type of employee benefit plan that grants employees the right to purchase shares of their employer's company at a predetermined price after a specified time period.

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Q. Does the ESOP supplement the salary of an employee?

?A. Yes, ESOPs are often used to supplement employee salaries. Instead of offering a higher salary, companies may offer ESOPs, which can potentially generate more wealth for employees if the company performs well.

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Q. Is ESOP risky and is there a possibility of monetary loss?

A. ESOPs can be risky, especially if the company's performance doesn't meet expectations. If employees accept ESOPs instead of a higher salary and the company underperforms, it could result in monetary loss for the employees.

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Q. How is the exercise price determined for ESOPs?

A. Companies have the flexibility to determine the exercise price for ESOPs. This price may be set at a discount or premium, but it cannot be less than the par value of the shares.

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Q. Is it mandatory for the company to issue and allot only fresh shares under the ESOP scheme?

A. No, it's not mandatory for the company to issue and allot only fresh shares under the ESOP scheme. The company can choose to issue either fresh shares or use existing shares. If fresh shares are issued, the company typically follows the direct route, while existing shares can be allocated through the trust route.

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Q. How are ESOPs taxed in India?

A.????????ESOPs have dual tax effects in India. Firstly, when an employee exercises their rights and purchases company stock, any difference between the fair market value and the exercise price is considered a perquisite and taxed at the employee's income tax slab rate. Secondly, when the employee sells the stock after exercising the option, any profit is subject to capital gains tax, with the classification as short-term or long-term capital gains depending on the holding period.

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