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ESOP Regulations – The Economic Times

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May 22, 2023


What’s Inside

A big chunk company’s success lies in the hands of its employees. Hence, encouraging them with the right rewards, especially financially, is a boost like no other.

This is where the ESOPs come in. An ESOP or Employee Stock Ownership Plan works for employer-employee benefits. It gives its workers an ownership interest in the company via shares of stocks.

This plan rewards the company as well as its employees. But first, you need to understand its working and terms to reap all benefits of SEBI ESOPs.

Understanding SEBI ESOPs

The SEBI (Securities and Exchange Board of India) regulates ESOPs (Employee Stock Ownership Plans). It aims to encourage employee ownership within companies. It fosters sincere employee contributions with a promise of financial rewards in exchange.

With this plan, employers offer stocks of the company to employees at lower costs. Further, these shares get enchased after a certain period at a certain price.

How Does it Work?

Firstly, the employers decide how many shares to offer under ESOPs, and prices and provide a grant date.

Following this, the allotted ESOPs remain in the trust fund for the vesting period. After the vesting period, employees can exercise these ESOPs and buy company shares at given prices.

Eventually, selling these shares brought under ESOPs helps with gaining profits. But there are specific SEBI ESOP guidelines that both parties must follow to reap the benefits of SEBI ESOPs.

Common Benefits of SEBI ESOPs

For Employees:

  • Employees can benefit through the company’s stock ownership by owning sections of the company’s share capital.
  • Employees just pay a nominal rate to buy these shares. Moreover, there are no additional costs.
  • The company also distributes profits through dividends to its shareholders.

For Employers:

  • ESOPs help to retain employees as they need to stay within the company throughout the vesting period.
  • Profits and rewards encourage employee productivity.
  • Being additional compensations, ESOPs attract new employees. It’s easier to gather more talent as start-ups by offering ESOPs.

SEBI ESOP Regulations to Follow

The updated SEBI ESOP guidelines in 2021 state the following.

Broader Scope of Employee Eligibility

The benefits of ESCOP no longer extend to just ‘exclusive employees.’ Instead, it reaches ‘employees,’ which states a non-exclusive basis. Previously, the eligibility stretched to only permanent employees of the company, which now incentivises non-permanent employees too.

No Vesting Period Upon Death or Permanent Incapacity of Employees

If an employee dies or faces permanent incapacity, there will be no vesting or lock-in period. The benefits will be immediately transferred to nominees or legal heirs. Previously, SEBI ESOP regulations did not mention such cases.

Flexible Scheme Implementation

Current SEBI ESOP guidelines permit companies to change the implementation scheme if necessary. In such circumstances:

  • Companies require the approval of shareholders beforehand
  • Changes must not be prejudiced towards employees.

Limits on Sweat Equity Shares

The limits set on sweat equity shares as per new SEBI ESOP regulations include the following:

  • Listed companies can issue sweat equity shares no more than 15% of the prevailing yearly paid-up equity capital.
  • Sweat shares issued and unlisted on the IGP (Innovators Growth Platform) must not exceed 25% of existing paid-up equity shares.
  • Companies listed on IGP cannot issue over 50% of total sweat shares of existing paid-up shares.

Using Excess Shares After Scheme Wind-ups

When a scheme is approved by shareholders, the excess money or share must be transferred to another recommended scheme.

Summing Up

Today, employee compensation has evolved beyond basic payments and offers. It focuses on employee encouragement through several implementations, including the Employee Stock Ownership Plan.

The companies act 2013, and SEBI keeps updating ESOP regulations to make them simple but robust globally. There are many benefits of SEBI ESOPS if you understand its terms and conditions.

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Frequently Asked Questions

1. What Is The Minimum Lock In Period For Esops?

The minimum lock-in period, that is, from the grant date to the vesting date, is one year.

2. What Is ESOP Rules Under Companies Act 2013?

Companies Act 2013 with SEBI list certain guidelines for ESOPs in companies. These rules define issues, resolutions, lock-in periods, etc.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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ESOP Regulations – The Economic Times


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