How an ESOP for Private Companies Works

Introduction 

Employee Stock Ownership Plans (ESOPs) may make you wealthy if you understand how they function. Employees, drivers, masseuses, warehouse workers, and others have become billionaires as a result of ESOPs. Many of these billionaires have been generated by well-known esop for private companies like Google, Facebook, Infosys, Zomato, Paytm, Oyo, and others.

While the primary motivation for implementing such a plan is employee wellbeing, there are clear benefits for the business as well. This article explains what an Employee Stock Ownership Plan is, how it works, how it affects employees and employers, and how it operates in both unlisted and listed organisations.

 

ESOP for private companies listed 

The SEBI rules have drawn a very fine line between an ESOP programme for a listed business and one for an unlisted one. Employee Stock Purchase Scheme is the name given to an ESOP Scheme for a publicly traded corporation (ESPS).

Employee Stock Purchase Plan is defined in Rule 2 Sub Rule 4 of the SEBI Guidelines as a scheme in which a esop for private companies distributes shares to its workers as part of a public offering or otherwise. A corporation can only do so if it is publicly traded.

The distinction between the Employee Stock Ownership Plan and the Employee Stock Purchase Scheme is razor-thin. The main distinction is the issuance of shares. While an ESOP gives workers the right to acquire the esop for private companies shares at a fixed nominal price without imposing any responsibility to do so, an ESPS does not provide employees with a right but instead allows the esop for private companies employees to purchase the shares at a reduced price at a specified pace. A discount of up to 15% off the market price of the shares is possible. Underneath an ESPS, employees' after-tax earnings can often be used to acquire shares. ESPS, on the other hand, is a programme in which workers contribute to the plan by accepting payroll deductions between the offer date and the purchase date, therefore saving for such a purchase, as opposed to ESOP, which is more of a compensation approach.

All other features of ESPS are covered under the SEBI Guidelines, which include:

i.  The purchase of shares is a necessary move.

ii. The process of distributing such shares

iii.Resolutions on compliance

iv. Criteria

v.  The Board's responsibilities, for example, remain the same as under the ESOP Scheme.