06 April 2009 Thank you. However, the guidelines does not mention about private companies ESOP. Can a private company with just two directors who will be holding all the share capital issue any ESOP. If yes what are the guidelines? How can we arrive at a market price when the shares are not listed.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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24 July 2024 Yes, a private unlisted company can indeed have an Employee Stock Ownership Plan (ESOP). ESOPs are a common method for private companies to incentivize employees by offering them an opportunity to own equity in the company. Here’s how you can navigate the guidelines and considerations for implementing an ESOP in a private unlisted company in India:

### Guidelines and Regulations:

1. **Companies Act, 2013**: The Companies Act, 2013, governs the issuance of securities, including employee stock options, by companies in India. Section 62(1)(b) of the Act specifically covers the issuance of shares through ESOPs.

2. **SEBI (Share Based Employee Benefits) Regulations, 2014**: While SEBI primarily regulates listed companies, private companies issuing ESOPs may voluntarily comply with certain provisions of these regulations for best practices and governance standards.

3. **Income Tax Act, 1961**: The Income Tax Act governs the tax implications of ESOPs for both the employer and the employees. It includes provisions related to the valuation of shares, tax treatment at the time of exercise, and sale of ESOP shares.

4. **Valuation Guidelines**: ESOPs require the company to determine the fair market value (FMV) of its shares for the purpose of granting options. This valuation is crucial as it affects the tax liability of employees upon exercise of options.

### Arriving at Stock Option Price (Valuation):

1. **Engage a Registered Valuer**: Private companies are required to obtain a valuation report from a registered valuer to determine the FMV of their shares. The valuer assesses various factors such as financial performance, future prospects, industry conditions, and any other relevant factors.

2. **Valuation Methods**: Valuation can be done using various methods approved under the Income Tax Rules, 2017, such as:
- Discounted Cash Flow (DCF) method
- Comparable Company Analysis
- Net Asset Value (NAV) method
- Any other method approved by the Government of India

3. **Price per Share for ESOP Grant**: The ESOP grant price is typically set at the FMV per share determined by the valuer on the date of grant. This ensures that the options are granted at an arm's length price, reflecting the true value of the company’s shares.

### Implementation Steps:

1. **Board Approval**: Obtain approval from the Board of Directors for implementing an ESOP scheme.

2. **Shareholders’ Approval**: Depending on the shareholding structure and provisions of the Articles of Association, shareholder approval may also be required.

3. **ESOP Scheme Document**: Prepare an ESOP scheme document outlining the terms and conditions of the plan, including eligibility criteria, vesting schedule, exercise period, and other relevant details.

4. **Compliance**: Ensure compliance with all legal and regulatory requirements, including filings with the Registrar of Companies (RoC) and adherence to SEBI guidelines if voluntarily applicable.

### Professional Assistance:

Given the complexities involved in implementing an ESOP, especially in private unlisted companies, it’s advisable to seek assistance from:
- **Chartered Accountants (CAs)**: For valuation and tax compliance.
- **Company Secretaries**: For drafting ESOP scheme documents and ensuring regulatory compliance.
- **Registered Valuers**: For conducting the valuation of shares.

These professionals can provide guidance tailored to your company’s specific needs and ensure that the ESOP is implemented effectively and in compliance with all applicable laws and regulations.