Employee Stock Ownership Plan (“ESOP”) are one of the prominent instruments used in the corporate and start-up world to attract, retain and motivate the high skilled and talented personnel of the business. ESOP motivates the employees to drive the performance of the organization, resulting in maximization of shareholder’s value and thereby align the employees’ interest with that of the organization.
ESOPs are a handy tool for cash strapped but high potential start-ups and MSMEs to compensate their key employees handsomely and also keep them motivated. Some of the benefits of ESOPs are as follows:
ESOPs are issued by means of a written agreement with the employees. Some of the significant terms generally used in these agreements are as follows-
ESOP are issued under the ESOP scheme (“ESOS”) formulated by a listed company in accordance with SEBI ESOS Guidelines and by an unlisted company in accordance with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014. The accounting treatment of ESOP issued by an Ind-AS compliant company is governed by Ind-AS 102 ‘Share Based Payment’, whereas companies complying with Companies (Accounting Standards) Rules, 2006 shall apply ‘Guidance Note on Accounting for Employee Share-based Payments’ issued by ICAI for ESOP accounting.
The need for valuation during the lifetime of an ESOP arises from the following events
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