The government has now allowed the startups to issue ESOPs i.e. Employee Stock Ownership Plans to their employees for a period of 10 years from their registration as a startup.
This is one of the Government Policies to encourage startup growth and entrepreneurship. Earlier, the limit to issue ESOPs or shares to the employees was till 5 years of the Startup India registration.
Which are the Companies eligible to issue ESOPs?
As per the MCA’s recently introduced Companies Amendment Rules 2020:-
- Those companies that qualify as ‘startups’ in accordance with the Department for Promotion of Industry and Internal Trade (DPIIT) 2019 policy shall be eligible.
- Additionally, the paid-up capital of the startup should be at least 15% while issuing sweat equity.
Read the MCA Notification.
Why the Govt has allowed startups to issue ESOPs?
As we know, COVID-19 has disrupted the normal course of business. Many startups are facing the problem of liquidity crunch in the market,
- This can be evident from the current layoffs of workers, and salary cuts.
- In such a situation, the startups often issue ESOPs to engage their employees with them.
- ESOPs work as a perk for the employees and gives them hope that it will be a lucrative offer later on.
Due to the liquidity crunch problem, startups are low on funds. Hence, the government has enabled the startups to issue ESOPs and compensate their employees by offering them equity ownership
This will indeed, serve as a key incentive to retain the employees.
How can a startup become eligible to issue ESOPs?
In order to become eligible to issue ESOPs, the startup needs to qualify as ‘startups’ in accordance with the Department for Promotion of Industry and Internal Trade (DPIIT) 2019 policy. And for this, the company needs to obtain the Startup India Registration certificate.
Besides, many other reliefs are given to the startups under the Atmanirbhar Bharat Package.
In case you need any kind of further guidance with regard to the Startup India Registration, or Company incorporation please feel free to contact our business advisors at 8881-069-069.
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