What Is an Employee Stock Ownership Plan (ESOP)?
Before understanding what is ESOP , first think, what could be the best way possible for a company or MNCs to make a perfect way for the growth of the company. Well it’s better to invest in themselves but it’s better if you could make your employees work harder but a perfect strategy would be in this way is ESOP. So, an employee stock ownership plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company. ESOPs give the sponsoring company, the selling shareholder, and participants receive various tax benefits, making them qualified plans.
ESOP creates a sense of ownership in the mind of employees and their interest in the organization remains intact.
As stated in ,The Companies Act, 2013 under Section 62(1)(b) provides that a company may, subject to compliance with conditions as prescribed under the Rules (in case of unlisted company) and SEBI Regulations (in case of listed companies), offering shares to the employees under a scheme of employees’ stock option.
Companies often use ESOPs as a corporate-finance strategy to align the interests of their employees with those of their shareholders. And this way ESOPs encourage employees to do what’s best for their shareholders since the employees themselves are shareholders of the company and provide company with good tax benefits, thus incentivizing owners to offer them to employees from the point of view of the company this is a perfect strategy and by this the employees working for the company puts more focus into better performance of the company. Only because they are also the shareholders of the companies.
HOW DOES ESOPs WORK?
Esops cannot be just distributed between by the company to every employee. Because these are some important terms we are talking about.
For example: A, worked at ABC Pvt Ltd. For 5 years now. Under the company’s employee stock ownership plan, they have obtained the right to receive 20 shares after the first year and 100 shares total after five years. Whenever A retires , he will receive the share value in cash.and it is noted that stock ownership plans may include stock options, restricted shares, and stock appreciation rights, among others.
There are always ups and downs in big large firms dealing with their big checks and everything. But as good these ESOPs sound they can be bad for the companies too. Well establishing them would be upon the companies financial working and future plan and some other major factors that you might wanna consider before issuing an ESOP.well let’s talk about why we should have them and why they should be avoided. It’s always better to be prepared for pros and cons.
REASONS WHY YOU SHOULD HAVE ESOPs.
These plans are tax-favored liquidity strategies that deliver fair value for shareholders.
These plans allow for a “low and slow” ownership transition.
ESOPs benefit the people who have helped create value in the Company.
ESOP companies are tax-favored, independent and sustainable.
Using an ESOP in your business creates and preserves the legacy of the company.
REASONS WHY YOU SHOULDN’T HAVE ESOPs.
ESOPs are very complicated plans.
It’s lacking a successor.
It’s incompatible with shareholders’ wishes.
Well now after studying both aspects we can say that these are only favourable for organizations which are starting their business operations on a bigger scale or expanding their business and whose growth rates are high, companies awarding their employees with ESOPs would work out to be the most feasible option than the cash rewards that they normally do but we must also know that these schemes uses cash flow for funding purchase of shares from its shareholders. In that case a company requires the funds for additional working capital or capital expenditures of the company ,the ESOP transactions would compete with this necessary requirement, creating a problematic situation for the management.
Thankyou for reading.