2. What is ESOP?
ESOP may be defined as a part of Employee
benefit plan under which employees buy, at a ‘fair’
value, the stock of the company and they may
become owners of the company for which they
work.
The concept of ESOP was introduced by lawyer
and investment banker Louis Kelso of USA in
1950’s.
In India, ESOP comes under existence in 1987.
ESOP may comes under AS-15 of ICAI, which is
Retirement benefits in Employer’s financial
statement.
3. What is need for ESOP?
To buy the shares of a departing owner.
To borrow money at a lower after-tax cost.
To create an additional employee benefit.
Capital appreciation.
Incentive based retirement.
Tax advantage.
Company reduces its tax liability.
4. How ESOP works?
It operates through a trust which is setup by the company .
Tax deductible contributions are distributed to individual
employee accounts within the trust.
Employee with minimum 1 years of service or 1000 hours of
work in a year is eligible for ESOP.
Employee with minimum 10 years of participation in ESOP
and 55 years of age, accounts upto 25% diversification on
his/her account.
This option continues until age 60, when employee get a
one-time option to diversify his/her account upto 50%.
Employee receive the vested portion of their accounts at
termination, disability, death or retirement.
5. Major Indian companies using ESOP
Wipro
Infosys
Dabur
P&G
HLL
ONGC
Tata technologies
ICICI Bank
Bharti tele-ventures
6. ESOP with respect to Wipro
WIPRO’s employees together have stock
options for 50 lakh equity shares of a
nominal value of Rs.2 each. The plan covers
executive and non-executive directors but
excludes promoter directors. The staff
turnover at WIPRO is as low as 4-5 percent
against an industry rate of 18-20 percent.
This shows the biggest advantage of ESOP,
that is, employee retention.
7. Caveats of ESOP
Investors object why employees should be given a
stake in the company at fair market value. It dilutes the
per share worth of existing investors.
Law does not allow ESOP to be used in partnerships.
Plan committee members can be held responsible if
they knowingly participate in improper transactions.
As value of stock appreciates substantially ESOP may
not have sufficient funds to repurchase stock.
With decrease in value of the company ESOP seems to
be less attractive to the employees.
8. Conclusion
Though having some threats, ESOP is
advantageous. It is used by the
companies to Reward, Retain, Attract
talent, Create a sense of Ownership in the
company and a Retirement benefit
scheme. Hence, it improves the corporate
performance as a whole.
9. Presented By:
Group 6
Section D
MBA (General)
Batch 2006-2008
