1. What is an ESOP?
An Employee Stock Option Plan (ESOP) gives eligible employees the right (but not the obligation) to purchase shares of the Company at a predetermined Exercise Price after the options have vested. It allows employees to participate in the Company’s long-term growth.
2. What is the difference between an Option and a Share?
| Option | Share |
|---|---|
| A right to purchase shares in the future | Actual ownership in the Company |
| No shareholder rights | Shareholder rights commence after allotment |
| Cannot receive dividends or voting rights | Eligible for shareholder rights as per law and Articles |
3. What does “Grant” mean?
A Grant is when the Company awards ESOPs to an eligible employee. Each option entitles the eligible employee to a specific number of equity shares.
The number of options granted to an employee will be mentioned in the Option Grant Letter.
4. What is Vesting?
Vesting means earning the right to exercise your options. The minimum and maximum vesting period is defined in the ESOP Scheme. The conditions relating to exercise and lapse of ESOP options are also part of the ESOP Scheme.
The dates of vesting and number of options to be vested are mentioned in the option grant letter issued to employee.
5. What is the Exercise Price?
The Exercise Price is the amount paid by an employee to convert each vested option into equity shares under the ESOP Scheme.
This price is determined by the Board/Compensation Committee and is normally mentioned in the Option Grant Letter.
6. When can an employee exercise his vested options?
The ESOP Scheme specifies when vested options can be exercised. Employees must exercise their vested options within the exercise period defined in the Scheme at the applicable Exercise Price.
7. What happens after exercising options?
Once an employee decides to exercise options, he needs to take the following actions:
- Submit the Exercise Application.
- Pay the Exercise Price.
- Receive Share Certificates or get the shares credited to the Demat Account.
After this, an employee becomes the shareholder of the Company.
8. Does an employee become a shareholder immediately after grant?
No. Employee becomes a shareholder only after completion of the following action points:
- his options are vested
- he exercises them,
- he pays the Exercise Price, and
- the Company allots shares.
9. Can an employee sell the options?
No. Options are personal to an employee and cannot be transferred, pledged, mortgaged or assigned, except in limited circumstances provided under the ESOP Scheme (such as death).
10. When will tax arise?
Generally, there are two taxation events under Indian income-tax law:
A. At the Time of Exercise
The difference between:
- Fair Market Value (FMV) of the share on the exercise date, and
- Exercise Price paid
is treated as a perquisite and taxable as salary.
The Company may deduct applicable Tax Deducted at Source (TDS) before allotting the shares.
B. At the Time of Sale of Shares
At the time of sale of shares, any gain over the acquisition cost is generally taxable as Capital Gains, subject to the applicable provisions of the Income-tax Act.
Note: Tax laws may change over time. Employees should consult their personal tax advisor for advice specific to their circumstances.
11. What happens if the Promoters decide to sell the Company or employee’s ESOP shares are required to be sold?
If the Promoters decide to undertake any Liquidity Event, as defined in the Scheme (such as a sale, merger or other qualifying transaction), they may require holders of ESOP shares to participate in the sale under the Drag Along provisions of the ESOP Scheme.
If this happens, employee will receive a written notice specifying the number of shares to be sold, the sale price, the transaction timeline and the documents to be executed. You will be required to complete the necessary formalities, including exercising any vested options (if applicable) and signing the transaction documents.
Importantly, employees shares will generally be sold on terms no less favourable than those applicable to the Promoters.
12. Is an employee entitled to receive dividends before exercising options?
No. Only shareholders are entitled to receive dividends and other shareholder rights.
13. Is receiving ESOPs guaranteed every year?
No. Grant of ESOPs is entirely at the discretion of the Board/Compensation Committee and depends on the eligibility criteria and Company policy.