Final Esop
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Transcript of Final Esop
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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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