Katyana
Hr Professional
Nishar
Professional
+1 Other

Please share about the Employee Stock Option Plan with current practices about this plan. Nisha
From India, Pune
Hi Nisha,

Pl find below the comprehensive details about ESOPS.

What are ESOPs?

ESOPs are stocks of a company offered to an employee either at the time of joining, or when such a plan is introduced. The offer, or option to buy, is usually valid for a fixed period, known as the vesting period, and can either be exercised in phases during the period, or at the end of it. The price the employee has to pay is usually less than the market price. That is what makes an ESOP attractive

Why ESOPs?

Tech companies were the early starters of ESOPs, now several industries have embraced this practice.

ESOPs are usually used to control attrition. At the time the offer is made, you only have to agree to the schedule and the price and usually don't have to buy anything. Depending on the schedule, a part of your stock option actually becomes yours, whether it is every year or once in a couple of years.

Stock options for employees

Different companies have different reasons for offering ESOPs, If the company wants to reward employees for achievements, the vesting period could be short. The following are some of the common ways in which listed companies reward their employees with stock.

If you are being offered ESOPs by an unlisted company, it could be a risk. So be sure to get an exact stock valuation first.

Graded vesting:

This is annual vesting over a period and is the most common way of giving ESOPs. For instance, Air Deccan has offered ESOPs with vestments of 15 per cent, , 30 per cent and 40 per cent over four years. "Even if someone leaves before the end of the vesting period, he can still exercise part of the option,". This is usually done to retain employees.

Performance-linked graded vesting:

This is the route taken by companies that not only want employees to stay, but to work better. Here, the percentage of shares allotted depends on the performance of the employee.

Bullet vesting:

In this case, the entire allotment is made at the end of the vesting period.

Employee stock purchase schemes:

Employees are offered their company's stock, usually at market price, by paying for it out of his salary over a three- to 27-month 'offering period'. This could be risky if the stock price tanks.

Taxation of ESOPs

Stock options can be taxed in two stages

Pre-sales

Not applicable to listed companies selling shares according to Sebi guidelines. Stock options are taxed in unlisted companies. It applies from the date the company allots shares to its employees.

Pre-sale tax

Prevailing share price: Rs 2,000

Exercise share price: Rs 1,800

Perquisite: Rs 200

Perquisites added to income, tax deducted at source

This is when an employee sells the stocks bought through an ESOP. The date of allotment of shares, after the employee buys it, is important. If a company goes for a public offer after an ESOP, for taxation, the status at the time of sale of ESOPs will be taken.

Post-sales

Post-sales

Post-sale tax



This is when an employee sells the stocks bought through an ESOP. The date of allotment of shares, after the employee buys it, is important. If a company goes for a public offer after an ESOP, for taxation, the status at the time of sale of ESOPs will be taken.





If u required more details drop me a mail.

KATYANA

From India, Gurgaon
Dear Katyayna,

I was going through your post and I have the smilart situation. Actually I work for HCL Technologies and we were alloted the ESOPs in 2002 & 2005. I sent my application to the Finance for exercising and while the application was under processing, we have been now asked to pay the perquisite tax, which is costing me additional money. I've the following 2 questions pertianing to this -

1. What is the effective date when the perquisite tax has been implemented in place of the Fringe Benefit tax i.e. is it 01-Apr-2009 or 01-Apr-2010? Because, if its 01-Apr-2010, then I shouldn't be paying the perquisite tax for my last exercising of ESOPs.

2. Now that we are being TDSed by the company based on the perquisite (i.e. FMV (Stock price on the prior business day of exercising the ESOPs) - Grant Price). In other words, its assuming that we are selling the shares on the exercise date at the FMV & we are being charged tax on the highest pay bracket. Whereas we aren't doing it, we are just acquiring the shares. The basic attraction of the ESOP was only the discount price, it was being offered at (Grant Price). Now with the introduction of the perquisite tax, which is simply assuming that the employee is making the profit at the FMV, the ESOPs are simply loosing their sheen.

Thanks & Regards,

Alok

From India, Delhi
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