The ESOP (Employee Stock Ownership Plan) trust route has become a preferred approach for private limited companies due to its simplicity and efficiency in managing employee equity. This mechanism streamlines share allocation, eliminates the need for repetitive approvals, and ensures liquidity. Additionally, it fosters trust among employees by transferring shares to a dedicated trust account, providing transparency and security.
Understanding the ESOP Trust Route
Under the ESOP trust route:
- The company establishes an Employee Welfare Trust to manage ESOP shares.
- The trust holds shares on behalf of employees and manages their allocation and buyback.
- Employees exercise their options through the trust, ensuring smooth and streamlined operations.
Challenges Faced in absence of Trust
- Repeated Approvals for Allotments
- Under the direct issuance model, company required board and shareholder approvals for every individual allotment of shares to employees.
- Lack of Liquidity for Exiting Employees
- Employees who left the organization faced difficulties in liquidating their shares due to a lack of secondary market access. Under the trust route, the trust buys back shares at predefined rates, ensuring a structured exit for employees.
- Dilution of Promoter Ownership
- Frequent issuance of new shares led to equity dilution, raising concerns among promoters about losing control.
- Administrative Complexity
- Managing vesting schedules, tracking employee entitlements, and handling compliance added significant administrative burden on HR and finance teams.
How TO Overcome These Challenges?
Solution: Transition to the ESOP Trust Route
- Simplifying Approvals
- The company established an ESOP trust, obtaining a one-time approval for the ESOP scheme.
- Future allocations and exercises were managed directly by the trust without requiring repetitive approvals.
- Ensuring Liquidity Through Buyback
- The trust bought back shares from exiting employees at Fair Market Value (FMV) using funds allocated by the company.
- These shares were then reallocated to new employees, maintaining the liquidity cycle without affecting the company’s cash flow directly.
- Retaining Ownership Within the Company
- Instead of issuing new shares, the trust purchased existing shares from promoters or the market for allocation to employees.
- This preserved the equity structure and prevented dilution of promoter stakes.
- Simplified Administration
- The trust maintained comprehensive records of share allocations, vesting schedules, and exercises.
- It also served as a single point of contact for employees, addressing queries and managing transactions.
Conclusion
If you’re considering implementing or transitioning to the ESOP trust route, exploring its benefits can transform your organization’s employee ownership strategy while ensuring operational efficiency and long-term growth, let’s connect on Mail id: info@sncoglobal.com
