Employee Stock Option Plan (ESOP) is a plan through which a company awards Stock Options to the employees based on their performance. An employee stock option is a “call option” meaning that under an ESOP the employees have the right and not an obligation to buy the shares of the company on a predetermined date at a predetermined price. The objective of ESOP is to motivate the employees to perform better and improve shareholders’ value. Apart from giving financial gains to the employees, ESOP also creates a sense of belonging and ownership amongst the employees
ESOP Valuation is required for Accounting purpose for booking Compensation Expense by company issuing ESOP’s over Vesting period and for Taxation purpose for calculation of perquisite Tax payable by its employees. The compensation expense reduces the EPS of the company and the possibility of Excess Tax payout by employees may turn the ESOP scheme unattractive. Thus proper planning of ESOP is inevitable and valuation plays a critical role here.
ESOP accounting in India is prescribed under guidance note 18 on accounting for Employee share based payment (2005 edn.) issued by the ICAI
ESOP valuation can be done by Intrinsic value method using Income, Asset or Market Approach (like Business Valuation) or through Fair Value method (through Option Pricing valuation including Black Scholes or Binomial method). As per SEBI norms, in case a Listed Company issuing ESOP is not following Fair value method, it is nonetheless required to disclose the financial impact in its notes to account if it had followed Option Pricing method. Ind-AS 102 also require application of Fair Valuation for Accounting purposes.
As per Indian Income Tax Law, only a SEBI Registered (Cat-I) Merchant Banker is authorized to do ESOP/ Sweat Equity valuation for determination of perquisite tax payable in hands of employees / Directors/ promoters etc.
ESOP by its nature result in minority stakes for the prospective shareholders. Thus we need to arrive at minority shareholder valuation in ESOP by applying minority valuation methods. In case we are considering any control methodology, suitable discounts should be provided based on empirical evidence and facts of the case. Even in case of Accounting Valuation (for company) and Tax Valuation (for employees), there could be difference in Valuation approach again due to quantum of options.
We are a SEBI Registered (Cat-I) Merchant Banker and our dedicated valuation team with extensive experience will help you in quantifying the value of ESOP’s for option holders. We do a detailed analysis of the Company history and its business and Comparable Companies multiples for arriving at value for ESOP holders. We have a specialized ESOP( Employee Stock Ownership Plan) team which comes in a league of one of the best ESOP Valuation & RSU Consultants having carried out about 200 ESOP Valuations.