ESOP - Employee Scheme Scheme - CiteHR
Mukesh Tank
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Any one able to suggest a good ESOP scheme, win win for both employer and employee
Employee Stock Option Plan (ESOP)
A plan initiated by a company whereby a certain number of shares is reserved for purchase and issuance to employees. Such shares usually vest over a certain period of time to serve as an incentive for employees to build long term value for the company.
Many companies are using this method to attract and retain the best talent in the organisation.
In other words it is program within a company whereby employees are allowed to buy a specific number of stock options in the company for a specified amount of time.

Basically, an ESOP is a kind of employee benefit plan, similar in some ways to a profit-sharing plan. With an ESOP, a company sets up a trust fund. The company can contribute to the ESOP trust new shares of its own stock or cash to buy existing shares; alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan.

Shares in the trust are allocated to individual employee accounts.

Allocations are made either on the basis of relative pay or some more equal formula.

As employees accumulate seniority with the company, they acquire an increasing right to the shares in their account, a process known as vesting. Employees must be 100% vested within three to six years, depending on whether vesting is all at once (cliff vesting) or gradual.

When employees leave the company, they receive their stock, which the company must buy back from them at its fair market value (unless there is a public market for the shares). Private companies must have an annual outside valuation to determine the price of their shares.

ESOP (Employee Stock Option Plan) is a scheme where an employee is given an option to take shares of the company at a pre-determined price. The selection of the employees is done by Board of Directors or a committee or trust set up by the Board of directors. The idea is to reward the employees who have contributed to the growth of the company and retain good employees. Securities and Exchange Board of India has formulated guidelines for ESOP in listed companies (i.e. companies whose shares are traded on the stock exchanges). One can see the guidelines on the website of SEBI (sebi.gov.in). After going through the guidelines one can have a fairly good idea about ESOP. As far as I know there are no guidelines for un-listed companies though one committee set up by the government suggested the guidelines.
IT IS FULLY DIFFERENT TO SOP .................................................. .................................................. .................................................. ..................

Employee ownership can be accomplished in a variety of ways. Employees can buy stock directly, be given it as a bonus, can receive stock options, or obtain stock through a profit sharing plan. Some employees become owners through worker cooperatives where everyone has an equal vote. But by far the most common form of employee ownership in the U.S. is the ESOP, or employee stock ownership plan. Almost unknown until 1974, about 11,000 companies now have these plans, covering over 8 million employees.

Companies can use ESOPs for a variety of purposes. While most of the press attention has focused on ESOPs in public companies used as a takeover defense, this explains less than 2% of all ESOPs. Nor are buyouts of failing companies (1% of the plans) or exchanges of stock for concessions (3% of the plans) common purposes. Instead, ESOPs are most commonly used to provide a market for the shares of departing owners of successful closely held companies, to motivate and reward employees, or to take advantage of incentives to borrow money for acquiring new assets in pretax dollars. In almost every case, ESOPs are a contribution to the employee, not an employee purchase.

ESOP Rules
An ESOP is a kind of employee benefit plan, similar in some ways to a profit-sharing plan. In an ESOP, a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares. Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan. Regardless of how the plan acquires stock, company contributions to the trust are tax-deductible, within certain limits.

Shares in the trust are allocated to individual employee accounts. Although there are some exceptions, generally all full-time employees over 21 participate in the plan. Allocations are made either on the basis of relative pay or some more equal formula. As employees accumulate seniority with the company, they acquire an increasing right to the shares in their account, a process known as vesting. Employees must be 100% vested within three to six years, depending on whether vesting is all at once (cliff vesting) or gradual.

When employees leave the company, they receive their stock, which the company must buy back from them at its fair market value (unless there is a public market for the shares). Private companies must have an annual outside valuation to determine the price of their shares. In private companies, employees must be able to vote their allocated shares on major issues, such as closing or relocating, but the company can choose whether to pass through voting rights (such as for the board of directors) on other issues. In public companies, employees must be able to vote all issues.

Uses for ESOPs
To buy the shares of a departing owner: Owners of privately held companies can use an ESOP to create a ready market for their shares. Under this approach, the company can make tax-deductible cash contributions to the ESOP to buy out an owner's shares, or it can have the ESOP borrow money to buy the shares (see below). In C corporations, once the ESOP owns 30% of all the shares in the company, the seller can reinvest the proceeds of the sale in other securities and defer any tax on the gain.
To borrow money at a lower after-tax cost: ESOPs are unique among benefit plans in their ability to borrow money. The ESOP borrows cash, which it uses to buy company shares or shares of existing owners. The company then makes tax-deductible contributions to the ESOP to repay the loan, meaning both principal and interest are deductible.
To create an additional employee benefit: A company can simply issue new or treasury shares to an ESOP, deducting their value (for up to 25% of covered pay) from taxable income. Or a company can contribute cash, buying shares from existing public or private owners. In public companies, which account for about 5% of the plans and about 40% of the plan participants, ESOPs are often used in conjunction with employee savings plans. Rather than matching employee savings with cash, the company will match them with stock from an ESOP, often at a higher matching level.
Caveats
As attractive as these tax benefits are, however, there are limits and drawbacks. The law does not allow ESOPs to be used in partnerships and most professional corporations. ESOPs can be used in S corporations, but do not qualify for the rollover treatment discussed aboved and have lower contribution limits. Private companies must repurchase shares of departing employees, and this can become a major expense. The cost of setting up an ESOP is also substantial -- perhaps $30,000 for the simplest of plans in small companies and on up from there. Any time new shares are issued, the stock of existing owners is diluted. That dilution must be weighed against the tax and motivation benefits an ESOP can provide. Finally, ESOPs will improve corporate performance only if combined with opportunities for employees to participate in decisions affecting their work.



Hi, depending upon your management need you can frame ESOP scheme. If your Company is listed than you must comply with SEBI guidelines. Else you can have your own scheme. The process goes like this.

1. Constitute a remuneration committee and identify key employee to whom you wish to give shares.

2. Issue share warrant to identified employee with and option to convert the part of the warrant into shares over a period of time.

3. For example Mr. A will received a warrant with an option to apply for 100 shares. The time lines for application of shares shall be for 30 shares after Mr. A has completes 1 year, for next 30 shares after Mr. A completes another 1 year and for balance 40 shares Mr. A has to complete another 1 year. In this way Mr. A will work with your company for 3 years and will get 100 shares.

4. The price of shares should be the face value, hence you can issue shares of Rs. 10/- only for Rs. 10/- the employee will benefit if the market value of the shares is more than issue price. If your company is not listed the employee will benefit when the company will go for listing.

You can prepare your policy accordingly.

Just press 09967590445 for any further information or clarification.

Regards,

Mukesh TANK

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