The employees of any company play a very crucial role in the success of the company. Thus it is very important for every company to retain its employees and prevent employee turnover. ESOP acts as one of the biggest motivation for all the employees and it lets them feel that they are participating in the affairs of the business entity. One crucial thing to be noted about ESOP is that they give the employee a right to purchase the share, but not an obligation, to buy a certain amount of shares in the company at a predetermined price for a certain number of years.
Eligibility Criteria of ESOP for Private Limited Company
ESOP in private limited company can be issued to following class of employees-
1. Permanent employee of the company who has been working in India or outside India
2. A director of the company, whether a whole time director or not but excluding an independent director; or
3. An employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company
However, the following categories of employees are not eligible for obtaining ESOP-
1. An employee who is a promoter or a person belonging to the promoter group
2. A director who either himself or through his relative or through body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.
Procedure of ESOP
Following is the procedure to be followed for giving an option of ESOP in private limited companies to employees-
1. In order to issue the ESOP a board meeting shall be conducted and a resolution should be passed approving the scheme of ESOP.
2. Further, the general meeting must be conducted to approve the scheme by Shareholders.
3. At the general meetings held the ESOP Scheme shall be approved by passing aordinary resolution.
4. Form MGT-14 should be submitted with special resolution within 30 days of passing the resolution.
5. After obtaining the approval of ESOP scheme by the shareholders, the options to the eligible employees must be granted.
6. The options must be exercised by the employees
7. As soon as the options are exercised file form PAS-3 (Return of Allotment) shall be filed with ROC.
8. The company shall maintain a Register of Employee Stock Options in form SH-6 and shall forthwith enter therein the particulars of the option granted.