Submitted by:

ANKIT JAIN 119

RAJ JAIN 122
AANCHAL SAINI 144
ANSHUMAN SARKAR 149
KRISHNA GADODIA 113
PRACHI LADDHA 159
What are ESOPs?
An Employee Stock Option Plan (ESOP) is a plan wherein a
company grants options to its employees.
 It allows you to buy the share at a certain price. It could
be at a market price or at a preferential price as
decided by the company.

 ESOPs a compensation tool long followed in the IT

sector, are gradually becoming a part of the salary
package in media, retail and other high-growth sectors.
 Reward top management and "key" employees and link
their interests with those of the company

 Options are the most prominent form of individual equity

compensation

 A stock option gives an employee the right to buy a

certain number of shares in the company at a fixed price
"grant" for a certain number of years

 Allows employees to "cash in" by exercising

(purchasing) the stock at the lower grant price and then
selling the stock at the current market price
 Employee Stock Ownership
Plans
 Equity based contribution benefit plan

 Like profit sharing, an ESOP includes at least all full-time

employees meeting certain age and service
requirements.

 Employees do not actually buy shares in an ESOP.

Instead, the company contributes its own shares to the
plan, contributes cash to buy its own stock (often from
an existing owner), or, most commonly, has the plan
borrow money to buy stock, with the company repaying
the loan.
Eligibility...
 Employee should have worked with the
company for a minimum of one year

 The employee should also be a confirmed

employee

 The performance rating of the employee

for the last one year should be
"Exceptional"(L I) or "Very Good"(L2)
Furthermore…
 The employee should be in a key position in the
company.

 The employees should belong to the "must retain"

category.

 Consistently outstanding performance by the

employee is rewarded accordingly.

 The decision to award stock options to the

employee is taken by the management council.
Limitations

 An employee who is a promoter or a part of the

promoter group shall not be eligible to participate
in the ESOP.

 A director who either by himself or through his

family or through any investment company, directly
or indirectly holds more than 10% of the equity
shares of the company shall not be eligible to
participate in the ESOP.
 Shareholder Approval

 The ESOP shall be approved by the shareholders by a

special resolution.
 The resolution shall contain terms and conditions of the
following:

• Identification of classes of beneficiaries entitled to participate In

the ESOP.
• Vesting of the Stock Option
• Period of exercise and process of exercise.
• Exercise price or pricing formula.
• The appraisal process for determining the eligibility of employees to
the Stock Option Plan.
• Upper limit on the quantum of stock options to be issued in the
aggregate.
 Vesting and exercise of
options
 There should be a minimum period of one year
between the grant of options and vesting.

 There should be a maximum period of eight years

between the grant of options and vesting.

 Employee options must be exercised within a

maximum period of five years from the date of
vesting.
Non transferability
 Options shall not be transferable, and only the
employee shall be entitled to exercise the options.

 They can not be pledged, hypothecated, mortgaged

or otherwise alienated in any other respect.

 In the event of the death of the employee, while in

employment, all the options granted to him as on
the date of death shall pass along his estate and
shall be fully vested in his estate as on that date and
may be claimed by his legal heirs.
How does ESOP work?
 The ESOP operates through a trust, setup by the
company, that accepts tax deductible contributions
from the company to purchase company stock.

 The contributions made by the company are

distributed to individual employee accounts within
the trust.

 The amount of stock each individual receives may

vary according to pre-established formulas based on
salary, service, or position.
 The Operation Of the
Scheme
 The offer letters will be issued by 1 st January, 2009. This will
contain the number of shares the employee will get at various
dates during the three year period.

 If by January 1, 2009 , the employee is not eligible for ESOP ,

then he will be considered again in January 1, 2001.The
employee who becomes eligible in 2003 will get his last
instalment of shares in 2007.

 The shares will be allotted to the employee via the offer letter
for a block of 3 years and will be split into three instalments.

 The exact number of shares will be decided on the basis of

last year's performance and the length of service from the
inception of the company.
All the employees covered by this scheme will also be eligible
to receive bonus shares if any.

 If there is a rights issue , the employee covered under the

ESOP will be eligible to subscribe to the rights issue at the issue
price.

If an employees resigns from the company during the time he

is covered by the scheme, he will
a.. Not get any share if he leaves before January 1, 2001
b. Will get 1/3 of his shares if he resigns after January I,
2001 but before January 1, 2002.
c. Will get 2/3 of his shares if resigns after January 1, 2002
but before January l, 2003.
When is it offered?
 It is usually dependent on your company policy and your
designation.

 There are time limits for acquiring it as well. For example, some
companies give it after you complete atleast a minimum period
of employment.

 Stocks are also given in instalments. For example if your

company offers you 1000 shares, it might not give you all at
one go. Instead you will receive 200 shares after the
completion of each year for a span of five years.
Why do Companies offer
ESOP?
 When you buy and hold the shares of a company, you
become shareholders and part owners of the
company.

 Companies offer ESOPs to employees because

having a stake in the company along with wealth
generation would also increase motivation to work
and loyalty to the company simultaneously.

 Basically it is a retention tool by the company.

 What is in it for the
employees?
 Apart from the fact that it is a retention tool, it is a rewarding
tool too.

 An ESOP is over and above what you get as your salary.

 For example, say you earn Rs.20,000 per month. Your company
offers you 1000 shares currently priced at Rs.100 each which
makes your total worth Rs.1,20,000.

 Say after five years you sell your shares, if your company's
value shows an upward trend then you make a profit. Plus
owning the shares of your company also makes you part
owner.

 Therefore if you work hard, the company grows, which

increases its market value, whereby your share returns
increase as well.
Benefits to
employees:
 Improved relationships between
employees and management
 Favorable tax treatment compared to other
benefit plans
 Potential for wealth creation
 Sense of company ownership for ESOP
participants
 Increased morale and loyalty
 ESOP loan is non-recourse to employees
 Retirement plan correlated with employee
performance
When are they taxed?
 The ESOP is not taxed on acquiring the shares.

 You are taxed on the profit you make when you

sell the shares or transfer them.

 Transfer here refers to when you gift it to

someone or transfer it to someone else under an
irrevocable deed (they now own it, not you).
What are the new taxation
scheme of ESOP?
 The new scheme of taxation of Employees
Stock Option Plan initiated by Finance Bill
passed on 11th May 2007 and effective from
1/4/2007 is as follows
No taxation of perquisite in hands of employees.
Employer to pay Fringe Benefit Tax at the time
vesting of shares in Employees.
Employee to pay capital gains tax at the time of
sale of shares received under ESOP.
FM Speak
 ESOPs are fringe benefits given to the employees and, hence,
they should be taxed
 Such options are generally given to senior executives, who are
well-off
 Booming services sector, including software, doesn’t need
incentives

Industry Speak
 ESOPs help retain talent in sectors where the attrition rates are
high, and help improve productivity
 But research proves that ESOPs improve productivity and
profitability
 They are given to freshers and cut across management
hierarchies
 It does indeed need it if India has to emerge as a global
knowledge hub
How FBT on is
ESOP computed?
 Section 115WC(1)(ba) gives the method of
valuation of ESOP for the purpose of
imposing fringe benefit tax.

What the aforesaid provision states in simple

terms is Fair market value (FMV) of shares has
to be taken for valuation purpose.
The valuation date for FMV is the date on which
the shares are vested in employee.
The value of fringe benefit shall
be FMV reduced by amount paid by employee.
The FBT will be charged @ 33.99%
How the FMV is
determined?
Central Board of Direct Taxes has not come out
with method of Fair Market Valuation.But one
should expect that FMV shall be almost equal to
average rate on either NSE or BSE on the date
of valuation.
What is this vesting of
shares?
 Vesting of shares means the date from when an employee is
allowed to apply or exercise for the specified numbers of
shares offered by the company .

 Thus there are two limbs of vesting -one vesting percentage

and vesting period.

 For example, a company may grant option to an employee

on 1/4/2006 for 500 shares. As per the
company's ESOP plan, vesting percentage may be 20 %
each year with a vesting period of 5 years. Therefore , an
employee can apply for 100 shares in each FY starting
from Fy 2004-05 till Fy 2009-10.
Lapse of options

 It is important to know that ESOPs have an

expiration date. That is, even within the vesting
period, one can exercise his options only within a
particular time window specified in the
agreement.

 If the options are not exercised within that period,

they lapse. This period is called the exercise
period.
ESOPs of unlisted
companies
 In unlisted companies, there is no ‘market price’ or
a grant price available for an employee. The
company here fixes an internal value to its shares.
This is decided by the board of directors of the
company through a voting system.

 This value is reviewed and re-set periodically. In

such cases, an employee can exercise the option if
he finds it advantageous and sell the shares back
to the company.
A company announces an ESOP plan under which
company will allot 500 shares of company to certain
employees at a price of Rs 100. Those eligible
employees will have option of getting allotment of 100
shares on 1st day of October every year starting from
1/4/2007 for next five years.Let us say, Mr X an
employee fills out the ESOP application form on
1.7.2007 for allotment of shares . He is allotted 100
shares on 1/10/2007 . The market value on
1/10/2007 , (vesting day) is RS 500. These 100 shares
, let us think , hypothetically, sold by the employee on
31/3/2009 at a price of RS 1200. Then
 FBT to be paid by the employer company will be
33.99% on (Rs500-Rs 100)x 100 nos=Rs 16000.Since
the vesting date is 1/10/2007 ,FBT will be paid in the
year of vesting i.e FY 2007-08 .
 There will be long term capital gain on 31/3/2009 since
the the shares allotted on 1/10/2007 are hold for more
than one year. The long term capital gains shall be
computed as under
 Sale consideration RS 1200 x 100 = Rs 1,20,000
Less
 Cost of acquisition is FMV for FBT purpose i.e Rs 500x
100 =Rs 50,000
 Long Term Capital Gains = Rs 70,000
Current scenario:
 "IT companies use ESOPs to remain competitive
with their multinational peers, who offered big
packets and stock options to their employees”.

 But with the traditional sector companies getting

caught in the war for talent following the increasing
competition as well as the entry of multinationals,
ESOPs are finding their way among them as well.
Some examples:
 Chennai-based Murugappa Group will soon join
several other companies from the traditional
sectors that plan to offer employee stock option
plans (Esops) for the first time to attract and
retain talent.
 Some more leading names including Omaxe Ltd,
DLF Ltd, Purvankara Projects Ltd plan to offer
ESOPs to their employees for the first time.
Thank you!!!