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Employee Stock Option Plan refers to a certain ownership scheme through which an employee of the company is benefited from. By the name itself it can be clearly understood that the employee shall get some ownership interest in the company in which he is working for. This has been defined under section 2(37) of the Companies Act, 2013 which states that this is an option given to the directors, officers or employees of a company or of its holding/subsidiary companies the benefit of right to purchase/subscribe to the shares of the company at a date in the future and at a predetermined price. Thereby, the company can get its capital raised by further issuing shares to its employees. However, there is no obligation on the employee to issue the share.


ESOP can be issued by all companies (other than listed) in accordance with the provisions of the Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014. Section 62(b) of the Companies Act, 2013 provides that a company can further increase its capital by issuing shares to the employees under the said plan. Listed companies can issue ESOP in accordance with SEBI (Share Based Employee Benefits) Regulations, 2014 commonly known as ESOP Guidelines.


The Companies (Share Capital and Debenture) Rules, 2014 are laid down to make the entire procedure more systematic. Rule 12 of the said rules state that the shares cannot be issued to the employee unless the requirements are complied with such as-


i. The Employee Stock Option Scheme must be approved by the shareholders of the company by passing a special resolution (the term employee is also defined).

ii. Company will have to make relevant disclosures in the explanatory statement which is to be attached in the notice itself. These disclosures shall mention relevant and significant information such as number of stock options, the vesting periods, options to be granted to one particular employee, method to value the options, conditions, etc.

iii. Freedom to determine price.

iv. Minimum period of one year between vesting and granting of option.

v. The grant specified to the employee shall not be transferable.

vi. Details of the ESOP to be disclosed in the Directors' Report by the Board of Directors.

vii. Maintaining a register of ESOP.


Similarly, the SEBI (Share Based Employee Benefits) Regulations, 2014 have laid down specific guidelines which are to be complied with by a Listed Company who wants to issue shares to its employees. These guidelines mention-


i. Administration and implementation of the scheme.

ii. The pricing of the option.

iii. The minimum vesting period of one year.

iv. Rights of the holder.

v. Consequences of failure to exercise the option granted.


All the rules laid down by specific authorities have made the procedure of granting options to the employees by a company very systematic and procedural.

Also read- Difference between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)

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