Question

Explain Employee Stock Option Scheme.

Answer 1

Employee Stock Option Scheme (ESOS): Under this scheme, permanent employees, Directors or officers of the company or its Holding Company or Subsidiary company are offered the benefit or right to purchase the Equity Shares of the company at a future date at a pre-determined price. ESOS encourages employees as they feel proud to be owners of the company for which they are working and the company also benefits as it can retain good employees.

Provisions related to ESOS are as follows:

1. A company may offer the shares directly to the employees or through an Employee Welfare Trust.
2. The shares are offered at price less than the market price.
3. There is a minimum vesting period of one year.
4. Usually, the company will specify the lock-in period, i.e., period during which the employee cannot sell his shares. The Lock-in period is a minimum of 1 year between the grant of an option and vesting.
5. Shares issued under this scheme do not enjoy any dividend or voting rights till the employees buy the shares.
6. The company has to get the approval of shareholders through a special resolution to issue ESOS.
7. The employee cannot transfer his option to any other person nor can he pledge or mortgage the shares issued under ESOS.
8. The company has to set up a compensation committee to administer ESOS. The company has to fulfill the provisions of SEBI (Share Based Employee Benefits) Regulations, 2014.