ESOPs and Sweat Equity

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An Employee Stock Option Plan (ESOP)allows a company to awards/compensate its employees in form of stock options, basis their performance. Under stock option, employees have the right and not an obligation to buy the shares of the company, at a predetermined price, on a predetermined date. It acts as a tool for Employee retention, motivation and creating a sense of belongingness amongst employees.

ESOP valuation is required for accounting purpose for booking compensation loss in Profit and Loss account by company issuing ESOPs. The ESOP accounting valuation is performed at the date of grant of options and compensation loss is apportioned over the vesting period. Further, the tax impact on perquisites value of ESOPs needs to be determined at time of exercise of options. 

For unlisted companies, Income Tax Act, 1961, mandatorily requires a SEBI-registered (Cat-I) merchant banker to do ESOP valuation for determination of perquisite tax payable in hands of employees.

However, for listed companies, there is no specification other than the valuation methodology; however, as it impacts the financial statements, auditors prefer valuations being carried out by trusted and efficient valuers with decent track records.

Our Team is expert in determining which approach is most appropriate, and tailoring the analysis to the specific situation at hand. We have deep experience with the full range of Option valuation techniques, including:

  • Intrinsic Value
  • Fair Valuation (Option Pricing Models) using various techniques:
  • Black Scholes Merton Model
  • Binomial Model
  • Binomial Lattice Model
  • Monte-Carlo Simulation Mode