Govt allows startups to issue ESOPs till 10 years after incorporation

The government has allowed startups to issue stock options or ESOPs to their employees for up to 10 years from their registration year. Earlier, the limit to issue these shares was till 5 years.

According to the Ministry of Corporate Affairs’ Companies Amendment Rules 2020, all those companies that qualify as startups under the Department for Promotion of Industry and Trade’s 2019 policy would be eligible. 

Also, while issuing sweat equity, the paid-up capital of startups should not fall below 15%, the notification added. 

The development comes at a time when Covid-19 has disrupted the businesses of the majority of the startups and has created a liquidity crunch in the market, followed by continuous layoffs, pay cuts and furloughing of employees.

The majority of startups use ESOPs to attract and retain employees. It is usually a significant component of compensation for employees with the hope that it will pay off big eventually. 

Given the liquidity crunch and startups being low on funds during the ongoing situation, the latest move of the government would help the companies compensate their employees in the form of equity and be able to retain their key employees.

In February this year, Finance Minister Nirmala Sitharaman had proposed to defer tax payment on shares allotted by startups to their employees under the Employee Stock Option Plans by five years in the Union Budget. She had also invited the feedback from startups up on the same.

The latest move also stands significant as the allocation of employee stock options by Indian startups has picked up in the past 3-4 years. The list of growth-stage companies that have expanded its existing pool and hundreds of their employees encashing via secondary transactions in the recent times include BYJU’s, Paytm, Oyo, Unacademy, Lenskart, Rivigo, and Swiggy.