ESOPs are benefit plans for employees that offer them ownership of their company. In simpler terms, ESOPs are the options provided to certain employees for buying the company's equity shares. They are exceptionally prominent with employees who have served a pre-defined time or exercise period. Similarly, the company can buy back the ESOPs anytime, provided the stockholders are willing to sell.
ESOPs help in building cohesion while also creating shareable wealth within the company. It has become a critical component of all lucrative remuneration packages companies offer to attract and retain talent. Today, most employees know ESOPs as their potential for wealth creation. Additionally, ESOPs incite a sense of ownership among employees while fostering accountability.
The reasons behind ESOP buybacks may vary. For instance, if the company's shares are unlisted, it may buy back to provide employees exit routes. Moreover, in a few cases, some companies believe that the shares' valuation can be higher, and they stand to earn more as they list. Hence, they indulge in ESOP and buybacks of shares.
The growing ESOP base in those companies that have upped their revenues and valuation can even expose an investor to those businesses whose shares are not directly available. Enterprises even buy back their shares from the public to boost stock prices along with investor sentiment. In addition, publicly traded stocks assist with resisting hostile bids for takeovers. The employees can use the shares to claim ownership, preventing company control from going to underserved individuals.
Even then, listed companies rarely indulge in ESOP buybacks, which is seen mainly among startups and companies listed abroad. The principal reason why companies buy back their ESOPs is to provide liquidity to their employees. Furthermore, controlling dilution within the company is also another notable reason.
Under Section 68 of the Companies Act, employees cannot pressure a company to launch an ESOP buyback exercise. The said Section also contains the other provisions governing share buyback and other assorted securities.
The provisions stipulate that the company must make an official buyback offer to its stockholders first, which is subject to their acceptance. Hence, no employee is legally bound to accept an ESOP buyback. Instead, the matter depends wholly on his voluntary consent to receive any conditions for buying back.
ESOP buyback has gained popularity over the years and is now frequently seen in the corporate world. The Flipkart ESOP buyback, for instance, has been viewed by corporate watchers as a well-thought-out plan for building cohesion within the company and creating shared wealth among its employees. Of late, schemes for ESOP buyback have received an impetus due to the fast-changing overall investment scenario.
Yes, it is. Section 115QA of the Income Tax Act of 1961 stipulates that share buyback by an unlisted firm can be taxed at a 20% flat rate on a "distributed income. That is the amount the company earns after subtracting the price it has paid in the share buyback from its original issue price.
According to provisions of the Income Tax Act of 1961, any ESOP plan allotted directly or indirectly by a present or ex-employee is taxable.