ESOPs in India: Navigating regulatory reforms and corporate practices

Companies continue to use a reward structure to retain and attract top talent, but this approach requires a thorough understanding of equity incentives. Indian companies have been using Employee Share Offerings (ESOPs) for decades, reflecting changes in compensation practices, corporate governance norms, and market dynamics.

To discuss more, Khaitan and Co. recently hosted an event on "Demystifying Stock Options and Other Employee Incentives" at its Bengaluru office led by Vinay Joy and Shabnam Shaikh, Partners at Khaitan and Co.

The panel comprised Superna Shankar (Vice President, HR of Infosys), Venkatraman Narayanan (MD and CFO of Happiest Minds Technologies), Vinod Menon (General Counsel of Accel), and Sharayu Jadhav (General Counsel of ACKO Insurance), who shared valuable insights on the legal frameworks, equity plan nuances, and practical challenges faced by companies.

According to Elevation Capital's Startup PayPulse report 2023, about 80% of companies have a four-year ESOP vesting cycle, with 20% having a longer period. ESOP allocation typically makes up 10-50% of the cash offered to startups in entry to mid-level roles.

Delving into the legal framework governing ESOP issuance in India, Joy and Shaikh provided a comprehensive overview—from dissecting various equity plans companies utilise to assessing case studies showcasing practical ESOP implementations.

The panel also discussed differences in ESOP execution for listed companies compared to unlisted entities, as well as strategies for extending ESOPs to consultants and promoters, including the establishment of trusts for issuance.

Interests in ESOPs increased shortly after the emergence of the Indian startup ecosystem in the 2010s, with startups, including Flipkart, Paytm, Zomato and Ola, adopting them. Recent regulatory reforms have facilitated their adoption, and ESOPs have gained popularity across various industries, including banking, pharmaceuticals, manufacturing, and retail.

In fact, earlier this month, Meesho, the SoftBank-backed ecommerce startup, launched the largest ESOP buyback programme, raising Rs 200 crore ($25 million) and creating wealth for more than 1,700 employees.

The discussion also encapsulated the myriad challenges faced by organisations today—from liquidity constraints during ESOP exercises to the imperative need for effective communication with employees.

The session also shed light on the challenges faced by companies in incentivising consultants and promoters through equity schemes. Regulatory barriers often exclude these vital stakeholders, undermining morale and hindering organisational growth, they highlighted.

Panellists advocated for regulatory reforms to create a more conducive business environment, aligning regulations with evolving business needs.

One key takeaway resonated among the panellists—employees are empowered to make informed decisions concerning their financial well-being by simplifying the complexities surrounding equity incentives.

While ESOPs can serve as catalysts for individual and collective success, employers must convey realistic expectations, which underscores the need for transparency amid the success stories surrounding ESOPs.

A call for action

The panellists also discussed the necessity for lawmakers to reevaluate existing regulations and introduce tailored exemptions or amendments to facilitate equitable compensation mechanisms for consultants and promoters.

Such actions, advocated by Jadhav, could pave the way for a more business-friendly environment in India, aligning with policymakers' efforts to enhance the nation's economic landscape.

The event provided corporate leaders with valuable insights on ESOPs and incentive plans in India, bridging the gap between legal frameworks and practical implementation strategies.