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Fundamental Analysis

Employee Stock Ownership Plan (ESOP)

Employee Stock Ownership Plans (ESOPs) have emerged as one of the most effective ways to both create and retain wealth for employees and owners in the modern business environment. They enable employees to share in the ownership of the organization, in which they play an integral role in building, advancing from a team member to a stakeholder in the organization's success.

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ESOP

What Are ESOPs?

Employee Stock Ownership Plans (ESOPs) are structured plans that provide employees the right to purchase shares of the company at a price determined in advance after a specified period. ESOPs act as a bridge between employee performance and company success — establishing a link based on loyalty to the organisation, contribution to the organisation's success, and alignment with a long-term goal. In short, ESOPs are simply a benefit to employees that allows them to "own" a piece of the company in which they work, capturing some of the benefits of the organisation's growth and increasing valuation.

Why companies elect to use ESOPs:-

  • Attract & retain top talent without an immediate cash outlay
  • Reward employees through equity participation
  • Enhance employee accountability & commitment to the organisation.
  • Align employee interests with overall company performance

How ESOPs Work

Grant

The company issues ESOPs to eligible employees as a part of their compensation package. The issue allows them to have the option (not the obligation) of purchasing stock at a specific future date at a fixed "exercise price."

The Grant Letter will include:

  • Number of options being offered
  • Exercise price per share
  • Vesting schedule (timeline when the options may be exercised)

Vesting

Employees will accumulate a right to exercise the ESOP in stages over time period—this process is known as vesting. Example: If an employee receives an ESOP grant of 1,000 options with a four (4) year vesting schedule, with a vesting of 25% per year, they will be able to exercise 250 shares each year. Vesting serves the dual purpose of retention and rewarding the long-term commitment of the participant. Some plans tie vesting schedules to performance milestones.

Exercise

After the options have vested and the employee can exercise them, the employee is now able to "exercise" the options, meaning that the employee purchases the shares by paying the predetermined exercise price, regardless of the current market price.

Example
Exercise Price ₹100
Market Value ₹300
Gain ₹200 per share

Employees have options to keep the shares or sell, usually depending on a liquidity event such as an IPO (Initial Public Offering), buyback, or secondary share sale.

Sale

After the employee has exercised their options, if the employee has received shares, they may sell their shares as well. The employee sells the shares in one of two ways: either on the open market (for listed companies) or to an investor (or the company) (for non-listed companies). The profit made from the sale is treated as a capital gain for tax purposes. Sharescart eases this process by linking you to vetted buyers, taking care of the paperwork, and facilitating a fast, safe, and no-fuss transaction. Get immediate liquidity while maximising the value of your ESOPs.

Categories of ESOPs in India

Publicly Traded Companies

Employees will easily be able to sell their ESOP shares on the open market after their exercise; with a publicly available share price, the valuation of the shares will be easy to establish, and liquidity guarantees effective exit strategies.

Privately Owned Companies

Liquidity may be limited. Employees will only be able to sell shares in the ESOP during a company-led buyback or through a secondary sale process. A valuation will have been conducted by a merchant banker who is registered with SEBI and follows regulations for these valuations.

Start-ups (DPIIT-Recognized)

Start-ups frequently utilize ESOPs to reward early employees for their substantial risk and to preserve cash in the early days. Tax deferrals are provided to start-ups under the government law

ESOP

Value of ESOPs

For Employees:

  • Wealth generation through the increased valuation of the company.
  • Sense of ownership and alignment with company vision
  • Future financial gain derived from share appreciation in value

For Employers:

  • Retain and motivate high-performing employees
  • Align the workforce with the company vision
  • Non-cash incentives improve the cash intake and out-take efficiency.
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Why Sell ESOP Shares?

Employee Stock Ownership Plans (ESOPs) can be an excellent means of participating in a company's growth. However, there are a few reasons an employee may decide to sell (the ESOP shares have to be converted to shares before a sale occurs)

Immediate Liquidity Needs

In some instances, a shareholder needs liquidity for personal consumption or other immediate financial needs. If a shareholder sells some ESOP shares, this is an easy way to get cash.

Profit Booking

If the current market price of the shares has reached a price level that the shareholder believes is the best sale price, selling will lock in the profit.

Tax Benefit

Sometimes, the tax burden associated with the gain from the ESOP shares can be material. Employees may decide to sell if the balance after taxes provides sufficient profit to meet their financial needs or goals.

Important Note

You cannot directly sell ESOPs. The ESOP must first be exercised (the vesting period is typically 3-4 years) to convert options into shares. It is only after you have exercised the ESOP that a sale becomes possible, based on your personal financial goals. Strategically selling ESOP shares will allow the employee/stockholder to realise gains, satisfy financial goals, and manage portfolio risk.

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Reduction of Portfolio Risk

Selling a portion of ESOP shares can provide liquidity to reduce concentration (e.g., by reinvesting in other companies). When it comes time to consider future investment, a balanced and diversified investment portfolio is essential.

ESOP

Tax Levied on ESOPs in India

The taxation of ESOPs occurs twice: at the time of exercise and at the time of sale.

Stage 1: At the Time of Exercise

Upon exercising the options, employees' taxable income is the difference between the Fair Market Value (FMV) and the exercise price. This amount is considered a perquisite income that is, the income is added to the salary.

Taxable Value = (FMV – Exercise Price) × Number of Shares

The employer will deduct the TDS on the entire amount as per the slab rates applicable.

Example:
  • FMV = ₹200
  • Exercise Price = ₹100
  • Taxable perquisite = ₹100 per share.
  • Taxed as salary income based on your slab rate.

Stage 2: At the Time of Sale (capital gains tax)

The difference between the sale price and the fair market value (at the time of exercise) is taxed as capital gains.

Type of Company Holding Period Type of Gain Tax Rate
Listed > 12 months Long-Term 10% (u/s 112A) on gains > ₹1L
Listed ≤ 12 months Short-Term 15% (u/s 111A)
Unlisted > 24 months Long-Term 20% with indexation
Unlisted ≤ 24 months Short-Term As per income tax slab

ESOP Accounting and Valuation

For compliance purposes, companies are required to identify the fair value of options on the date of grant with an appropriate valuation model, such as the Black-Scholes model. 

  • Fair value would be expensed in the profit & loss account over the vesting period.
  • For unlisted companies, the fair value must be assessed by a Category-I Merchant banker.

This assures both accounting in the record and compliance for tax purposes.

Key Risks and Considerations

  • Liquidity Risk – Unlisted shares may not have a buyer immediately.
  • Tax Burden – Dual tax occurs regardless of liquidity in the shares, except for startups.
  • Valuation Risk - Market value may sometimes differ from fair market value.
  • Vesting Forfeiture – Vesting options that are not vested lapse should the employee leave early.
Companies should promote transparency to allow employees to make informed decisions.

Example:

Amit Has Only 6 Months to Exercise His ESOPs, but ₹1.6 Crore — Here's How Sharescart Saves His Gains

Employee Stock Ownership Plans, or ESOPs, can have tremendous value; however, exercising them usually means a sizeable cash outlay including both the exercise price and taxes due. Let's break it down with an example.

Meet Amit

Amit works at a fast-growing, early-stage startup and has 1,00,000 vested ESOP options — this means he has the right to purchase a share of the company at a set price, but he must exercise the options within a certain time frame - in Amit's situation, 6 months

Key Details:

  • Exercise Price: ₹100 per share
  • Current Market Price (FMV): ₹300 per share
  • Tax on Capital Gains: 30%
  • Exercise Window: 6 months

The Challenge

If Amit decides to exercise his ESOPs:

  • Cost to Convert ESOPs into Shares: To convert his options into shares, Amit must pay ₹1 crore (i.e., 100,000 shares × ₹100 per share).
  • Value of Shares after Exercise: The shares are currently valued at the market value of ₹3 crore (i.e., 100,000 × ₹300), so he has a theoretical gain of ₹2 crore (₹3 crore - ₹1 crore).
  • Tax Liability: The gain will be taxed at 30%, so Amit must pay ₹60 lakh in taxes (i.e., 30% of ₹2 crore).
  • Total Cash Requirement: ₹1 crore (exercise price) + ₹60 lakh (tax) = ₹1.6 crore.

This is the issue: Amit does not have ₹1.6 crore on hand. If he does not exercise all or part of the options within 6 months, all of his ESOPs will expire worthless, and he will have lost the potential market value of ₹3 crore.

How Sharescart Assists

This is where Sharescart becomes relevant. Sharescart is a bridge funding platform that supports employees to unlock the value of their ESOPs. Here's how it works:

  1. Funding the Exercise Price & Taxes: Sharescart provides him with a fund to use to exercise his ₹1.6 crore. This allows Amit to exercise all his options on time without borrowing from his savings.
  2. Unlocking Value: After exercising the options, Amit now owns shares worth ₹3 crore in the pre-IPO or unlisted market.
  3. Selling the Shares: Amit sells these shares to an investor through Sharescart or through a pre-IPO market. After paying back the investor/fund, Amit has ₹1.4 crore, which is the true wealth he unlocked from the ESOP.
Scenario 1: Amit Exercises ESOPs via Sharescart
Amit Needs Exercise ESOP
→
Sharescart Funds ₹1.6 Crore
→
Amit exercises + ₹60 lakh
→
Sharescart Faciliate to ₹3 Crore
Sell shares via ESOP
→
Gains worth ₹3 Crore
→
Repay sharescart ₹1.6
→
Amit keeps ₹1.4 crore profit

The Result

Without Sharescart, Amit's ESOPs would have expired uselessly, missing out on a potential value of ₹3 crore.

With Sharescart: Amit exercises his options, pays tax, sells the shares, and collects ₹1.4 crore in cash. In laymen's terms: Sharescart fulfils the promise of employee invested value close to ₹1.4 crore and will sell the ESOP if the employee has no cash to purchase it, while ensuring the employees do not leave their invested value to expire because they lack cash.

Scenario 2: Amit Does Not Exercise (No Sharescart)
Does Not ₹1.6 Cr For His needs
→
Cannot Exercise
Options expire after 6 months
→
₹0 Loss
Conclusion

ESOPs as a Means to Shared Success

ESOPs are so much more than just a compensation tool — they create a culture of ownership and alignment for employees that directly supports the ongoing long-term success of the business. For employees, ESOPs can be an important opportunity for wealth building — if they (the employees) understand tax consequences, valuation, and timeframes associated with liquidity. For employers, ESOPs can provide a strategic advantage — loyalty, innovation, and a focus on a shared growth mindset are cultivated. When designed in an open and transparent way and managed in a responsible manner, ESOPs are a true win-win for employees and the organisation.

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ESOP Shares

How to Buy and Sell ESOP Shares

Buying Of ESOP Shares
Choose Your Desired Shares

You can scan through the companies and decide which company to invest in. Once done, you can tell our team about the desired investment.

Payment To Sharescart

Our team will share the account details so that you can transfer the trade amount into our account. We will notify you about the document needed beforehand.

Delivery From Sharescart

The shares will reflect in your Demat account within 24 hours, depending on the holidays. Our details would be available to you before the transfer.

Portfolio management

We can help you with your portfolios by managing your investments and assisting you in the buying and selling of shares.

Selling Of ESOP Shares
Equity Details

To help you better we would require a few details related to the shares you want to sell and the price at which you want to sell.

Affirmation Of Demand

We find out a suitable buyer for you and once you accept the trade we move on to the next step.

Transfer Of Shares To Sharescart

The account details would be provided to you for the transfer of shares. We will notify you about the details needed for the trade beforehand.

Get Payment From Sharescart

Once the transfer is done, the payment would be transmitted to your account within 24 hours, depending on the holidays.

Frequently Asked Questions

All You Need To Know About ESOP Shares

When you leave without vesting, generally unvested ESOPs are cancelled. Vested ESOPs usually can be exercised after you depart, often within 3 to 6 months, depending on the company's ESOP plan.

For companies listed on a stock exchange, you can sell the shares any time after you exercise the ESOP option and the shares are in your demat account. If the company is unlisted or otherwise a startup, you can only sell the shares if and when the company announces a buyback or has a process for secondary sales.

Whenever you exercised your options to hold shares, you entered into a market risk situation, and if the valuation of the company drops, so do the shares.

Receiving ESOPs as a grant is done at no cost. The only cost is the exercise price when you exchange options for stock after vesting.

The company provides FMV (fair market value) based on periodic valuations by a merchant banker. This process gives staff an objective sense of the paper value of their holdings.

Yes. Many Indian corporations also offer ESOPs to their employees in their subsidiaries abroad, and this is subject to FEMA and RBI regulations

They should have board and shareholder approval, implement a clear ESOP policy, have valuation certificates, and communicate openly with their employees.

ESOPs allow employees to share in the value creation of the company, which provides them the ability to create wealth over time and in conjunction with the success of the company.

No, ESOPs can only be issued to employees or directors of the company, although consultants and advisors may receive similar benefits through phantom stock or SAR-based plans.

No, ESOPs are not defined as a supply of goods or services, so they are excluded from GST.

The cliff period is the amount of time an employee must be with the company before their ESOPs vest, which is typically one year.

Yes, companies can reprice or restructure ESOPs, but this requires board approval and shareholder approval if there are significant changes in market conditions.

Yes. ESOPs are valuable to the employer in that the employer is able to retain the best talent, align employee interests with company goals, and preserve cash while rewarding performance.

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The people at SharesCart are professional, approachable, and easy to talk to. Even after delivering my shares, they followed up to check if I had any doubts or concerns. That level of care helped me trust them even more.

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