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Employee Stock Purchase Scheme (ESPS)



(ESPS is typically used by listed companies and is not used by private companies.  We are covering it briefly here)

An Employee Stock Purchase Scheme (ESPS) allows employees to subscribe to shares issued as part of a public issue or ‘otherwise’. ESPS is governed  by SEBI (Share Based Employees Benefits) Regulations, 2014 from 28th October, 2014. Earlier, it was governed by the  SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. Usually, it is a mechanism by which a listed company issues shares to its employees at a discount. All employees, except employees who are promoters (or part of the promoter group), or directors who own more than 10% of the shares of the company (directly or through relatives), are eligible to participate in an ESPS.

Under the ESPS, shares can be issued by listed companies to their holding or subsidiary companies. Often, listed companies undertake new business activities through subsidiaries, in which they hold more than 50 per cent or appoint most of the directors. This is especially true if the new venture is in a sunrise sector and is capital intensive, as the new vehicle helps in separating the assets and liabilities of the two legal entities. ESPS can be a useful way for such companies to incentivise employees of such ventures. Of course, they must compare the benefits of ESPS vis-à-vis ESOP schemes while deciding which is appropriate for their situation.

Shares are immediately issued under the ESPS and thus the employee does not have any vesting period over which they receive shares, as in the case of ESOPs. This enables employees to realize the value much faster. However, note that shares which are issued at a discount are subject to a minimum lock-in of 1 year and cannot be transferred for that period by the employee. The risk of stock prices falling lower after the lock in period is thus placed on the employee. Like in the case of ESOPs, the SEBI Regulations do not apply to private companies and unlisted public companies. ESPS is not a common method of employee incentivisation. They are typically used by listed companies.

A company is required to obtain shareholder approval by a special resolution for issue of ESPS, specifying the price of shares and the number of shares proposed to be offered to each employee, the process for determining eligibility of employees and the total number of shares to be issued.

In the case of ESPS, each employee who is eligible must be specifically identified while obtaining the shareholder approval, unlike ESOPs, where shareholder approval is taken for the ESOP scheme in general, without regard to which employees would specifically benefit from the scheme.


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