WORKERS

PARTICIPATION
In today’s turbulent business environment, a
new deal needs to be struck between
management and employees in the
workplace. The old contract, which
promised employees security and a decent
wage in exchange for dedicated service and
loyalty to  the company, is now dead. Yet
every company needs to meet the pressing
challenges of remaining competitive and
profitable.
Employee ownership occurs when a business is owned
in whole or in part by its employees. Employees are
often given a share of the business after
a certain length of employment or they can buy shares
at any time. They also often have board of
direcctors elected directly by the employees. Some
corporations make formal arrangements for employee
participation, called Employee stock ownership
plans (ESOPs).
 ESOPS

An Esop is qualified, defined contribution employee

benefit plan that invests primarily in the stock of the
employer company.
Employee Stock Option Plan (ESOP), is a plan through
which a company awards Stock Options to the employees
based on their performance. Under an ESOP, the employees
have right to buy the shares of the company on a
predetermined date at a predetermined price.
 Economic Objective
 Psychological Objective
 Social Objective
 Ethical Objective
 Political Objective
 Motivation
 A sense of belongingness and ownership amongst the
employees. 
 Retention Technique
 Tax Benefits
 Preventing Hostile Takeovers
 The trade union in india do not seem to favour this scheme;
while answering the questionnaire issued by theNational
Commission on Labour,
 INTUC expressed its disapproval of the scheme thus: “even if
the workers are given some shares in the company they will not
be able to have any effective voice or participation in the
management of the concern”.
 AITUC said : ”such a scheme has no validity at all in public
sector undertakings where the shares are entirely own by the
state. In the private sector,a nominal shareholding by the
workers can not give them any say in management.”
 Grant date - The date on which the company grants an option
to its employee. 
 Option price - The price at which such shares in a scheme are
offered. It is also known as the ‘strike price’ or ‘grant price’.
Normally such option price would be below the market value/
fair value of the shares on the date of grant.
 Vesting date - An ESOP would provide for a date on which an
option is vested with employees and time frame over which the
stock option would vest with employees (‘Vesting period’). 
 Exercise period - The employees would be given a time period,
called exercise period, within which they are required to
exercise the option. The date on which employees exercise this
option is known as ‘exercise date’.
ESOP can be a one-time plan or an
ongoing scheme depending upon the
objectives that the company wants to achieve. ESOPs can
be in the form of ESOS (Employee Stock Option Schemes),
ESPP (Employee Stock Purchase Plans), Compensation
Plans, Incentive Plans, SAR/Phantom ESOPs etc.
 Employee Stock Option Scheme (ESOS) - Under this scheme,
the company grants an option to its employees to acquire shares at
a future date at a pre-determined price. Eligible employees are free
to acquire shares on vesting within the exercise period. Generally
exercise price is lower than the prevalent market price.
 Employee Stock Purchase Plan (ESPP) - This is generally
used in listed companies, where in the employees are given the
right to acquire shares of the company immediately, not at a
future date as in ESOS, at a price lower than the prevailing
market price. Shares issued by listed companies under ESPP
will be subject to lock-in-period, as a result, the employee
cannot sell the shares and/or the employee has to continue with
the employer for a certain number of years.
 Share Appreciation Rights (SAR)/ Phantom Shares - Under
this scheme, no shares are offered or allotted to the employee.
The employee is given the appreciation in the value of shares
between two specified dates as an incentive or performance
bonus, that is linked to the performance of the company as a
whole, as reflected in its share value.
 In India, ESOPs are taxable as a fringe benefits.
 Companies Act
Issue of stock options requires approval of shareholders by way of
a special resolution as per section 81(1 a). This is not applicable
for private companies who can issue stock options without
shareholder approval but approval by the board of directors.
 Income Tax Issues
For employees:
Till recently, the difference between the cost of the share to the
employees and market value on the date on which an employee
got the share would be taxed as perquisite in addition to capital
gains tax payable by the employee on sale of those shares.
 However with the recent announcement by the Finance
Minister the perquisite tax has been removed. Tax is now
payable only at time of sale of shares as capital
gains.Since perquisite tax has been removed employers
are not liable for tax deduction at source, thus removing
administrative inconvenience.
 For the company:
As per SEBI guidelines listed companies have to account
for ESOP by treating the same as an expense. As yet
there is no clarity whether this expense will be allowed
as deductible expense by the Income Tax authorities.
 In India mainly information technology and softwares
firms introduced esop.
 In recent years,many FMCG,industrial firms have also
begun to offer stock options to their employees.
 In India INFOSYS technologies and WIPRO have esops.