An Introduction

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What is ESOP?

Employee Stock Option Plan (ESOP) is a plan through which a company awards Stock Options to the employees based on their performance. These plans are contracts between a company and its employees that give employees the right to buy a specific number of the company's shares at a fixed price within a certain period of time. Employees who are granted stock options hope to profit by exercising their options at a higher price than when they were granted.

It is a plan to compensate, retain, and attract employees. The objective of ESOP is to motivate the employees to perform better and improve shareholders' value. Apart from giving financial gains to the employees, ESOP also creates a sense of belonging and ownership amongst the employees.

SEBI ESOP Guidelines define Employee stock option, as it is an option given to the whole-time Directors, Officers or employees of a company which gives such Directors, Officers or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price.

In Indian context, ESOPs were introduced in early 90's when Indian IT Companies started using ESOPs as an Incentive plans for its senior management. ESOP is significantly used in the IT Companies because in IT industry employees are the most important assets for these companies.

Around 43% of the IT companies have given ESOPs to more than 90% of the employees, and only 17% of the Non-IT companies have done so, out of which 75% of the ESOPs are given to the senior and middle management employees because apart from the willingness of the management to offer ESOPs, it is also the preference of the employees. While a worker employee in a manufacturing company would prefer a cash incentive to a stock option.

ESOP Types

ESPS (Employee Stock Purchase Scheme)- An employee benefit, that some firms offer allowing employees to use payroll deductions to buy shares in the firm at a discount from their fair market value.

Restricted Stocks (RSUs)- Restricted stock, also known as letter stock or restricted securities, refers to stock of a company that is not fully transferable until certain conditions have been met. Upon satisfaction of those conditions, the stock becomes transferable by the person holding the award.

Stock Appreciation Rights- Stock appreciation rights (SARs) are a method for companies to give their management or employees a bonus if the company performs well financially.

Performance Shares- Performance Shares is the method of appreciation for the performance. The goal of performance shares is to tie managers to the interests of shareholders. Their goal is similar to employee stock-option plans, as they provide an explicit incentive for management to focus their efforts on maximizing shareholder value.

Phantom Stock- Phantom stock is a method for companies to give their management or employees a bonus if the company performs well financially. Phantom stock provides a cash or stock bonus based on the value of a stated number of shares, to be paid out at the end of a specified period of time. Phantom stock is essentially a cash bonus plan, although some plans pay out the benefits in the form of shares. Phantom stock is favored by closely held or family-owned companies who want to incentivize management and other employees without granting them equity.


Section 81(1A) of the Companies Act, 1956 and SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999 are applicable for the Public listed companies while private Companies are bound to follow the Articles of the Company and Companies Act, 1956.

In India there is no uniform legal structure followed by the companies. Companies plan the ESOPs as per their specific requirement and under the legal structure of India, the options available for the companies to create ESOP Scheme are Trust Route and Direct Route.

Where around 58% of the companies have preferred a Direct Route (Without an ESOP trust) and a significant number of (42%) of companies have preferred a Trust Route.

Our View
ESOPs are still in an evolving stage in India. We are yet to see companies differentiating on the basis of the sector they belong to, the category of target employee, etc. While in the US responses are faster, whereas in India companies are taking time to react.

Contact Person:

Ms.Anjali Aggarwal
Vice President
+911140622230, +919971673336,

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