Employee Stock Option Plans (ESOPs) are a well-recognised method of compensating employees and attracting and retaining the best talent. Compensation in the form of equity shares helps in creating a sense of ownership in the mind of employees. Benefit schemes for employees, including ESOPs, have gained popularity, especially in technology start-ups that have limited financial resources in the initial years, but want to attract the best talent. ESOPs are the option or a right, but not an obligation, which is offered by a company to its employees to purchase its shares at a pre-determined price in the future. ESOPs align the interest of the employees with long term interest of the companies and play a vital role in retaining employees at the growing stage of the company.

Section 2(37) of the Companies Act, 2013 (“Act”), defines ‘employees’ stock option’ as the option given to directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price. The Act expressly prohibits ESOPs for Independent Directors[1] as the law makers believe that it compromises the ‘independence’ of such Independent Directors. Section 62(1)(b) of the Act provides for the approval of shareholders by a special resolution. Rule 12 of the Companies (Share Capital & Debentures) Rules, 2014, lays down the legal framework for issuance of ESOPs for unlisted companies. Listed companies having ESOP plans are required to comply with the SEBI (Share Based Employee Benefits) Regulations, 2014 (“ESOP Regulations”).
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