Meaning

In today’s era of globalization, Employee retention has become a buzzword and accordingly ‘ESOPs’ i.e, Employee Stock Option Plans has emerged as one of the most important tools to encourage, attract and retain employees.

ESOP is the brainchild of a visionary economist named Louis Orth Kelso, who pioneered this concept with the vision that for capitalism to survive there needed to be more capitalists.

Employee Stock Option Plan/Equity Incentive Plan (commonly referred to as ESOP) is an employee-owner method that provides a Company's workforce with an ownership interest in the company.

The option granted under the plan confers a right but not an obligation on the employee. Stock options are subject to vesting, requiring continued service over a specified period of time. Upon vesting of options, employees can exercise the options to subscribe to the Company’s shares, by paying the predetermined exercise price. Extending benefits through ESOPs is like creating a win-win situation for both Employer& Employee.

Earlier, when the Companies Act, 1956, was formulated, the concept of rewarding Employees through Stock Options Route was not recognized by the Indian market and was first introduced in early 90s when Indian IT Companies were facing the sectors as well. Considering the increased recognition and upward trend, lawmakers have also acknowledged the ESOPs and accordingly chalked down specific provisions for the same to ensure transparency in the process of rewarding employees.

With the promulgation of Companies Act, 2013, provisions governing issuance of shares by offering Stock Options to the Employees have been recognized under Section 62(1)(b) of the new Act, read with Rule 12 of Companies (Share Capital and Debentures)Rules, 2014problem of poaching and brain drain. With the passage of time, ESOPs have gained importance not only in IT sector but in other sectors as well.

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