Know Important Terms Related To Employee Stock Option Plan

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  • By Taxmann
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  • Last Updated on 2 February, 2021

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SEBI have formulated a set of ESOP rules and esop taxation. These shares are different in various ways from normal shares and you may come across various terms that are only used about employee stock option plan. Let’s see what these different terms are:

Employee:

The term ’employee pertains to a permanent employee of a company who is either working in India or out of India. This would also include the whole time and independent director and the employees of any subsidiary or associate company.

Employee compensation:

This term means the total cost that employee incurs to the company as part of his salary which includes his basic salary, DA, bonus, and any kind of commissions. However, fair value of option granted under employee stock option plan is not part of employee compensation. Also, the discounts at which the shares are issued to employee under ESOP are also not part of employee compensation.

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Employee stock option:

This is an option given to whole time directors, officers, and employees of the company, to buy or subscribe to the shares at a future date as offered by the company on a pre-determined price.

ESOS (employee stock option scheme):

This pertains to the scheme under which the employee stock option planstock options are granted.

ESPS (employee stock purchase scheme):

This pertains to the scheme under which a company offers shares to the employee as part of public issue.

Exercise:

This term pertains to an application that is submitted by an employee to the company to issue the shares against the option vested by him in accordance to ESOS.

Exercise period:

It pertains to the time for which the employee is eligible to exercise his options after being vested into employee stock option plan.

Exercise price:

It is the sum of amount that an employee must pay to the company for the company to grant his shares in accordance to ESOS.

Grant:

This term means the issue of options to employees under employee stock option plan.

Independent director:

He is the director of the company. He may not be a whole time director and neither is a promoter or belong to the promoters group for that company.

Intrinsic value:

This term pertains to the excess of market price of share as part of ESOS over the exercise price of the option which includes the upfront payments if any.

Market price:

This pertains to the latest available closing price prior to the date of meeting of Board of Directors under which options are granted or shares are issues pertaining to the stock exchange in which the company shares are listed.

Option grantee:

This term means that an employee has rights to exercise his option under employee stock option plan however is not obligated to do so.

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