At Sperso Filings, we help businesses use ESOPs to attract, retain, and reward top talent. Our services include ESOP policy consultation, scheme drafting, and end-to-end support to ensure compliance and alignment with your business goals. Empower your team, build loyalty, and promote a culture of ownership with our expert ESOP solutions.
What is an ESOP?
An Employee Stock Option Plan (ESOP) gives employees the option to buy company shares at a fixed price. It’s a smart way for businesses to attract, retain, and reward their team—while aligning employee interests with the company’s growth.
Benefits of ESOPs
Boosts employee motivation as company value grows
Encourages long-term retention and loyalty
Rewards hard work, especially during tough phases
Saves cash by offering shares instead of payouts
Advantages and Disadvantages of ESOP
Advantages of ESOP
Motivation & Retention: Builds loyalty by giving employees a sense of ownership.
Tax Benefits: Offers tax perks to both employers and employees.
Cash-Friendly: Reduces cash outflow through non-cash compensation.
Disadvantages of ESOP
Ownership Dilution: Can reduce control as shares are distributed to employees.
Market Risk: Value depends on company stock performance.
Administrative Load: Requires effort and cost to manage properly.
How Does an ESOP Work?
When a company offers ESOPs, they’re kept in a trust during a vesting period. After this period ends, eligible employees can exercise their options—buying company shares at a pre-decided price, usually lower than market value. The company decides who gets the shares, how many, and at what price.
Cost of ESOPs and Distributions
Setting up and managing the ESOP
Buying company shares for employees
Providing loans to employees for share purchase
Tax-related costs for both employer and employees
ESOP Compliance Checklist (2024–2025)
Review Articles of Association for any provision related to issuing shares under an ESOP.
Document details of the Compensation Committee (date and members) in the board meeting.
Send notice for the General Meeting, clearly stating the number of ESOPs to be granted.
Conduct the General Meeting and pass an Ordinary Resolution for:
Approval of ESOP issuance
Formation of the Compensation Committee
Ensure Compensation Committee (CC) has a majority of independent directors.
Obtain shareholder approval through a separate resolution.
Prepare draft share certificates for allotted stock options.
File Form PAS-3 with the Registrar of Companies (ROC).
Disclose ESOP details in the Director’s Report.
Maintain ESOP Register in Form SH-6 at the registered office or another board-approved location.
Authenticate register entries by a Company Secretary or authorized board representative.
Eligibility for ESOP
Minimum age: 21 years, as per Indian regulations
Employees must be eligible in the year they join the company
Employers may require 2 years of service for eligibility—but only if the ESOP offers immediate vesting
Granting ESOPs: Step-by-Step
Prepare Directors’ Resolutions: Board resolution for each new grant.
Issue Grant Letters & Option Certificates:
Send Grant Letter to each employee.
Issue standalone Option Certificate.
Maintain an Internal Option Register:
Employee name
Number of options granted
Vesting & expiry dates
Exercise status
How to Register an ESOP
1. Draft the ESOP Rules
Create a document that defines:
How options are granted and exercised
Vesting schedules
What happens during exit or employee departure
Included Schedules:
Schedule 1: Grant Letter (terms of the option)
Schedule 2: Exercise Notice (submitted when options are exercised)
Schedule 3: Option Certificate (details of options, price, and vesting)
2. Approve ESOP Rules & Option Pool
Once finalized, get approval from the board and shareholders to:
Adopt the ESOP rules
Set up the total option pool
Allow the board to grant options
Approve issuance of shares upon exercise
3. Shareholder Waivers & Consents
If your company constitution includes pre-emptive rights, existing shareholders must waive these rights to allow the issue of ESOP shares.
Documents Required for ESOP
Minutes of the board meeting
Special resolution approving ESOP
Minutes of the general meeting
Board’s report
Register of Employee Stock Option Plan (Form SH-6)
Form PAS-3 (Return of allotment)
Form MGT-14 (Filing of resolutions with ROC)
Tax Implications of ESOPs
Tax on Exercise: FMV minus exercise price taxed as salary.
Capital Gains Tax:
Held over 12 months: Gains > ₹1 lakh taxed at 10%
Sold within 12 months: Taxed at 15%
Dividend Tax: Taxed as per applicable slab.
ESOP Calculation
Gap between FMV and exercise price is salary income. Sale proceeds minus FMV is capital gain.
Is ESOP Beneficial for Employees?
Financial Incentive: Discounted share purchase
Ownership Stake: Benefit from success
Tax Advantage: Long-term capital gains
Portfolio Diversification
Retirement Support
Procedure for Issue of Employee Stock Option Plan
Check AOA for ESOP provision; amend if needed
Draft ESOP as per Companies Act, 2013
Board meeting for approval
General meeting for finalization & special resolution
File Form MGT-14 with ROC
Maintain Register in Form SH-6
ESOPs to Employers
Boosts Engagement & Productivity
Reduces Turnover
Better Financial Performance
Tax Advantages
ESOPs to Employees
Ownership in the Company
Wealth Creation Opportunity
Retirement Benefits
Job Security
Why Companies Offer ESOPs to Employees
Attract & retain talent
Motivate employees
Reward contributions
Promote performance-driven culture
ESOPs from an Employee’s Perspective
Ownership & connection
Long-term wealth
Retirement savings
ESOP Taxation
Tax on Purchase: May be deferred
Tax on Sale: Capital gains tax by holding period
Tax on Distribution: Treated as income
What Happens to ESOPs When the Company Is Listed?
Shares become tradable on stock exchange. Employees can sell based on market price.
To Whom Can ESOP Be Issued?
Permanent employees in India or abroad
Directors (excluding independent)
Employees from subsidiaries/holding companies
Promoter group employees (not promoters)
Non-employees not eligible
Process and Allotment of ESOP
Grant of ESOPs
Exercise of Options
Allotment of Shares
Transfer to Demat Account
Payment for Shares
Regulatory Compliance
Reporting Obligations
Why Choose Sperso Filings for ESOPs?
Assessing owner readiness
Feasibility studies and valuations
Legal documentation
Funding and structure guidance
Setting up ESOP operation framework
Avoid unnecessary legal complexity—choose Sperso Filings for a seamless ESOP journey.
FAQs on Employee Stock Option Plan (ESOP)
Employees pay the exercise price to purchase the shares once their options vest. The company then allots the shares to them.
An ESOP is a plan where employees can buy company shares at a discounted price after a vesting period. It gives them ownership and links rewards to company growth.
No, ESOPs are not deducted from salary. Employees pay separately when they choose to exercise their options.
ESOPs are a benefit offered by the company, not a direct part of monthly salary. However, their tax impact is considered part of total compensation.
ESOPs offer long-term financial growth if the company performs well, while salary ensures immediate income. A mix of both is often ideal.
Employees receive stock options with a vesting period. Once vested, they can buy shares at a fixed price, which may be lower than market value.
Yes, companies can structure ESOPs to include future employees based on eligibility criteria.
No, the exercise price must be equal to or above the face value of the shares, as per regulatory norms.
Yes, private companies can issue ESOPs if allowed in their Articles of Association and approved by shareholders.
In case of a sale, vested ESOPs may be exercised, while unvested ones are subject to the terms of the ESOP policy or agreement.
Yes, ESOPs provide ownership benefits, potential for wealth creation, and can be a motivating factor when linked to company performance.