Understanding ESOP: Can Employees Sell Shares Anytime or Only After Leaving?

Hi,

I need information on ESOP. I want to know how it works. Is it the same as a retirement program, or can the shares be sold at any point by the employee? Do they have to wait until they leave the company?

Thanks,
Sheetal

Like Pon mentioned, the ESOP facility varies from company to company. Your line "...shares can be sold at any point by the employee?" seems to imply that the employee receives the shares [or stock, as it is called here]. NO... it means that the employee gets ALLOTTED a number of shares according to the company policy... it refers to the allotment. ONLY when the allotment is done can the employee sell.

This allotment usually occurs based on the period of employment... for example, x shares after 1 year of service, y shares after 2 years... and so on. When the company is not traded on any stock exchanges, the shares have to be sold back to the company itself OR to any existing employee... based on the book value of the shares.

I hope this clarifies.

Regards, TS

Thank you for your valuable information @tajsateesh @pon1965...

I would appreciate it if you could help me with more information on this. Basically, the situation is that an employee has a criteria of shares worth 1 lac in the appointment letter. I want to know whether it can be encashed or will it be credited after the employee leaves the company. Or, as TS said, it will get accumulated and can be sold after the employee leaves the company.

Dear Sheetal Ji, I would like to respond to you using different words. ESOP Overview

ESOP stands for Employee Stock Ownership Plan. This plan is not governed by any specific statute but rather by the company's policy.

Under this plan, employees have the option to own stocks without any upfront cost. The shares allocated in this scheme form part of the employees' remuneration for the work they perform. These shares are held in an ESOP trust until the employee retires or leaves the company. The shares are then sold upon the employee's retirement or departure at the prevailing market price.

Regulatory Compliance

The allotment of shares under the ESOP scheme must be done in accordance with the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. Companies like Wipro, Reliance, Trident, Zensar, Ramco, and many others have offered shares under this scheme to retain their top talents.

Regards

Dear Sheetal ji, while Googling after my above post, I found the said Guidelines of 1999 as per the attached file. I further found that those Guidelines from 1999 have now been replaced with new regulations in 2014, which prohibit companies from buying/selling their own securities in the secondary market.

New Employee Benefit Schemes

The New Regulations cover the following new employee benefit schemes that deal in shares of the company:
- Stock Appreciation Rights Scheme (SARS)
- General Employee Benefits Scheme (GEBS)
- Retirement Benefit Scheme (RBS)

I am not an expert in this subject. You need to consult your CA/CS to get more information on it.

Regards

Korgaonkar has given you a detailed backgrounder on ESOP. However, your line "........so want to know whether it can be encashed or will it be credited after the employee leaves the company...." seems to indicate that the ESOPs have been committed to this employee without any basis in terms of ESOP policy or guidelines being made by the Company. If the ESOP Policy is in place, the answer to your query is necessarily a part of the Policy for sure. But if the ESOPs have been allotted without any policy framework in place, that's a sure-fire way of inviting legal trouble. If you haven't found your answer in Korgaonkar's responses, please give more details about the issue/situation so that the members can give clear actionable suggestions.

Also, more than established companies, ESOP is most often used by startups that are scaling up since they are not hindered by many of the regulations that established companies have to adhere to.

Regards,
TS

Understanding ESOP and Its Implications

Nowadays, even some reputed organizations are offering shares at the joining stage itself under ESOP, with strings attached (minimum lock-in period), and reflecting such share values in the CTC structure to inflate the CTC. Employees who leave before the expiry of such lock-in period are bound to lose those shares.

Some companies charge nominally for the shares allotted under ESOP. In such scenarios, either the lock-in period is less or NIL. L&T follows this approach. In those companies, the shares are transferred in the name of employees immediately after the expiry of the lock-in period or from day one of allotment.

Regards

SEBI Guidelines on Selling Allotted Shares

As per SEBI guidelines, you cannot sell the shares allotted to you within six months from the last allotment. If you sell in the same financial year, then you need to pay the tax on Capital Gains. Hence, wait for a minimum of six months and the completion of the financial year before selling.

But bear in mind that if you leave the organization during the specified period, you will have to pay the company as per the prevailing market rate.

Furthermore, during the allotment of shares, you must pay 30% of the cost of the benefit you received as TDS (Please refer to FBT).

ESOP Guidance and Considerations

The foregoing discussion provides some pointers for the ESOP. Please note that it is not just the job of HR. It will involve your Legal Manager and Company Secretary as well. There are rules and regulations that must be followed. The terms and conditions of allotment, lock-in, sale, etc., are part of the plan prepared according to the regulations. You need to consult a professional for the same, as any non-compliance may entail legal action. Please feel free to connect with us if you need guidance on the same, and our experts will assist you in the matter.

Regards,
Avika Kapoor Vice President - Operations

Website: Kapgrow Kapgrow