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Understanding ESOP




Employee Stock Ownership/option/equity Plans have a fairly long history in the Western market economies but are of a very recent origin in our country. Ever since Luis Keslo structured an employee ownership plan in 1957, acquiring external funds for employees to purchase new equity, Stock ownership and Option plans have come a long way in their variety as well as their intensity of application.


In the U.S. it is estimated that 9% of all stock is held in different forms of ESOP.  Stock Option and equity linked plans became fashionable in the UK during the seventies and have been steadily growing. Similar is the case with Belgium, France, Germany and other European countries. It is estimated that several transitional economies and the NICs have found Stock Options, if not the ownership plans, a useful instrument serving multiple objectives. Organizations in countries like Pakistan, China and those in the Middle East have also begun to examine the feasibility of such plans, even though the capital markets are not very active as yet.


In the USA, ESOP is not equivalent to the stock option plans that we, in India, normally refer to – the need for the distinction arises due to the tax concessions and funding possibilities associated with an ownership plan.


In that sense, we do not have “ESOP” schemes in India but only equivalents of


  • Executive stock options
  • Non-qualified stock options
  • Incentive stock option
  • Equity linked performance plans
  • Stock appreciation rights and the like


More recently, the SEBI guidelines have used terms Employee Share Option Scheme (ESOS) and Employee Share Purchase Scheme (ESPS) that in due course may gain ground replacing the mistaken acronym of ESOP. In USA the term ESOP stands for Employees Stock Ownership Plan. 

These are the plans were employees own substantial part or the entire company. The Promoters of the company implement this plan with the objective of passing on the ownership to the employees.




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