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Employee

StockOption or

OwnershipPlan.

(ESOP)

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What is an ESOP?

An Employee Stock Option Plan is when the

company offers its shares to the employees.

An ESOP is nothing but an option to buy the

company's share at a certain price. This could either

be at the market price (price of the share currently

listed on the stock exchange), or at a preferentialprice (price lower than the current market price).

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Why It is given? Employees can receive stocks and

shares of their company through a

bonus, buy them directly from the

company, or receive them through an

ESOP.

The main purpose of an ESOP is

to reward and motivate employees

Companies reward their top

bracket management and executiveswith ESOPs.

It is basically used as an employee

retention tool to keep the top bracket

management and executives in the

company

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General Eligibility

The concerned employee must have completed a year working forthe company.

The employee should hold a key position in the company.

The employee should belong to the "must retain" category.

The employee must show company loyalty and have positive

performance appraisals.

ESOPs are generally given to employees who have served for a

long period of time or promise to do so at the time of employment

The management committee will reward ESOPs only to those who

have handled a lot of responsibilities in the functioning of the

company.

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TYPES OF ESOP

ESOs Granting employee the option to acquire the

shares of the company at a predetermine price

ESPS Shares are directly allocated at the time of a

public issue (may be at a discounted price) SARs Shares are allotted and employee is free to

exercise his option after vesting period. He can sell

them after locking period.(Cashless transaction for

employee)

Sweat Equity Shares issued for a consideration

other than cash

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RULES AND

REG

ULATIONS

COMPANIES ACT:Approval ofshareholders, not

applicable to private companies.

INCOME TAX ISSUES:

Foremployees:

Forthe company:

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EXAMPLE

A certain company grants an ESOP of 200 shares to a key

executive on 1-1-2010. The vesting period is 2 years. This

means that the employee cannot acquire those shares till 1-1-

2012 at a pre determined price.

Vesting Period: means that period of time after the grant of the

option during which the employee cannot

exercise the option by applying for the shares.

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ESOPS AT INFOSYS

When employees join they are offered say 100 shares at the currentprice in the market

Even after 2 yrs, the employees can buy the shares at the same rate.

In the 1st year, employees cant buy any shares, in the 2nd yearhe/she can buy 30 shares and then in the 3rd year, he/she can buy the

remaining no.of shares.

No. of shares allotted is fixed for employees at different levels for

Software engineers 100 shares

Program Analysts 250 shares

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ESOPS - TAX IMPLICATIONS

The government has made ESOPs taxable.

Previously, stock options were taxed at the time of exercise of

the optionby the employee.

But since 2000-2001, ESOPs are taxable only at the time of

selling of stocks.

At the time of sale of the security by the employee, the difference

between sale consideration and cost of acquisition (defined as fair

market value of these options) would be taxed as "capital gain".

Can ESOPs be Gifted ????

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IES CORPORATE HOUSE

ESOPS

12.2.2010 @ 100/

[Exercise Price]

12.2.2010 @ 200

[Market Value]

MR. X

AN EXAMPLE

MR. Y

Sells @ 500/-

Sale price Cost of

acquisition

Taxed as

Capital Gains

i.e. Tax on

Rs. 400/-

100/-500/-

12/2/2011

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Mr. X Mr. Y

Fairmarket value

on the dateofthe gift

Gifts

Mr. Z

Sells @ 800/-

Market Price

300/-Cost ofacquisition

100/-

Taxed: 300 100 = 200/-

12.2.11 12.2.12

Sale Price

Taxed: 800 300 =

500/-

TAX IMPLICATION

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The answer to this is, Yes. The employee who is entitled to the ESOP may

gift the options to any person. However, the donor will have to pay income

tax on the notional gains on the date of gift i.e. he will have to pay capitalgains tax on the difference between the fair market value of the gifted shares

/ warrants on the date of gift and the option price, if it has already been

paid.

Can ESOPs be Gifted ?

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ESOP Used in India for

Compensation

EmployeeRetention

Top ManagementCommitment

ESOP in India

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How does ESOP work? The ESOP operates through a trust, setup by the company that accepts tax

deductible contributions from the company to purchase company stock.

The amount ofstockeach individual receives may vary according to

pre-established formulas based on salary, service, orposition.

Theemployees may cash out aftervesting in the programorwhenthey leave the company.

When an ESOP employeewho has atleast ten years ofparticipation

in the ESOP reaches age 55, heorshe is given theoption of

diversifying his/herESOP account up to 25% ofthevalue. At theage 60, theemployee has option to diversify up to 50%

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Advantages to Companies

It is considered that having a stake in the

company would increase loyalty and motivation

substantially.

Potential employees can be attracted by a goodESOP Package.

Company reduces it's tax liability.

It is proven to beoneofthe best employee

retention tools.

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Advantages to Employees

BetterTax Exemptions compared toother

benefit plans.

Long Term Wealth Creation.

Increased morale and loyalty. Betteremployee-employer

relations

Sense OfJob Security. Incentive Based Retirement.

SenseofCompany ownership due to ESOP

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