If you've been a loyal employee, you might be eligible to own a part of your company's stock through ESOP (Employee Stock Ownership Plan). But did you know that you can also gain access to funds to buy your stocks?
ESOP funding is pretty straightforward - it's a loan offered to employees so they can acquire ESOP shares without using their money or other investments.
What are ESOPs?
Before we move to ESOP funding, it's essential to understand how an ESOP works. ESOP is an employee benefit plan that extends stock ownership options to the employees of a company. ESOPs are set up as trust funds, and allotments depend on the employer's discretion. Once allotted, ESOPs remain in the fund until the vesting period is over, after which you can exercise your ESOP options (buy the shares).
Under ESOP, you will receive an allotment letter outlining your grant (number of shares allotted) and the period you can exercise the option. Generally, the exercise price of shares is lower than the current market price. However, you must apply for ESOP funding if you need more money to buy the shares.
What is ESOP Funding?
- ESOP funding refers to the financial resources or mechanisms used by a company to establish and manage an Employee Stock Ownership Plan (ESOP).
- An ESOP is a program in which a company's employees are provided with an ownership stake in the company, often in the form of company shares. ESOP funding can involve various methods, such as direct contributions, leveraged buyouts, stock options, stock purchase plans, or other financial instruments, to acquire and allocate shares to employees.
- The purpose of ESOP funding is to incentivize and reward employees by giving them a stake in the company's ownership and financial success.
ESOP Funding Insights To Focus On
Let us evaluate some critical aspects of securing funds for your allotted shares:
- Lenders may offer ESOP funding only for companies listed on the stock exchange.
- Short-term ESOP funds allow you to exercise options, sell the shares, and repay the loan.
- The shares of the company you purchase will be held as security in a Demat account until the loan is repaid in full.
- If the available margin for ESOP funding falls, you might have to deposit additional collateral to secure the loan.
- Cashless short-term ESOP funds lower your interest costs as interest is charged only until the stocks are sold in the market.
- ESOP funding covers both the cost of the shares and the prerequisite tax payable.
- ESOP funding comes with margin requirements as most lenders offer loans for up to a certain percentage of the stock's current market price.
- Depending on the lender you pick, loan tenures vary.
- You can repay the amount using your funds or funds you receive by selling the shares.
- Interest rates and repayment terms for ESOP funding are generally low and flexible.
ESOP funding is a great way to finance your ESOP purchases without liquidating your assets. Thus, if you think the price of the shares will soon rise, you can exercise your ESOP options with easy finance options. However, the decision to opt for ESOP funding should be based on your assessment of the market price and grant price of the shares.
Frequently Asked Questions
1. What does ESOP stand for?
ESOP is an acronym that stands for Employees Stock Ownership Plan. ESOP is an employee benefit plan where the company offers its shares to employees at a discounted (grant) price, which can be encashed after a specific time.
2. Are ESOPs good for employees?
Yes. ESOPs have several benefits for employees, including:
- Stock ownership in the company they work for.
- Get a share of the company's profits through dividend payments.
- An opportunity to buy shares at a discounted price.
- ESOPs help build a corpus when shares are sold at a higher market price.