What is Employees Stock Option Plan (ESOP) Class 12

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Looking for what is Employees stock Option Plan (ESOP) as per class 12 Syllabus of CBSE, ISC, and State Board.

This topic is concerned with the Accounting for share capital chapter of class 12

Let’s understand it.

What do you Mean by Employees Stock Option Plan (ESOP) Class 12

Employees stock option refers to the option (right) given to the whole time directors, officers and employees right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price, which usually is lower than the market price.

Following are the characteristics of it.

  • Under section 62(1)(b) of the companies Act 2013, empowered the company to issue shares to its employees under a scheme of ‘Employees Stock Option’ by passing a special resolution at the general meeting of the company.
  • The employees may or may not excercise the option.
  • This is a voluntary scheme on the part of the company to give its employees a sense of belonging.
  • Shares allotted under this scheme shall be locked in for a minimum period of one year from the date of allotment. The shares can not be disposed off within one year from the date of allotment

What are the conditions for the Issue of ESOP:

A company may offer the shares (stock) under this scheme after fulfilling the following conditions:

These shares are of the same class of shares already issued by the Company.

A special resolution is passed by the company to this effect.

The resolution must specify the number of shares, the current market price, the exercise price, and the class of directors or employees to whom such equity shares are offered.

At the date of such offer, not less than one year must have elapsed since the company had commenced business.

The share must be issued in accordance with SEBI regulations.

What is the objective (Importance) of ESOP

Its main objective is to inspire the employees to have higher participation in the company.

Its other objective is to create long-term wealth in the hand of the employees.

Also, ESOP is a means to attract, retain and motivate good and efficient employees for the company.

What is Employee Compensation

The option granted to employees to subscribe to the shares of the company is because of their employment with the company.

Hence, the difference between the issue price and the market price is an expense for the company.

It is considered as ‘Employee Compensation’ and treated like deferred expenses which are to be amortized on a straight-line basis.

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Anurag Pathak
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