What are ESOPs?

ESOPs or Employee Stock Ownership Plans are a method of compensating employees for their work by giving them the option of getting company shares instead of a salary, although in some cases, it can be a mix of salary and shares which the employee can choose to either hold or sell to get cash.

A stock option in itself is a contract where the employee can choose to exercise it and get a determined number of shares at a determined time period.

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ESOPs are a way of encouraging performance in employees as the company’s share price is directly impacted by its financial performance. So the better the company does, the more valuable their shares become.

How many Swiggy employees are eligible for the ESOP program?

More than 3,200 employees across all levels and departments in Swiggy are eligible to participate in the program. The company itself has helped all of its five such programs, by buying back over ₹1,000 crore worth of shares.

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This also comes at a time when Swiggy is about to go for its initial public offering (IPO). Companies like Meesho, Purplle and Urban Company have conducted staff share buybacks this year, with Flipkart doing the largest ever worth $700 million last year, according to a report by the Economic Times. Razorpay and Udaan did so over the last two years.

Ola had also done the same, launching a $150 million program before its IPO in 2020.

Why is Swiggy launching the ESOPs liquidity program?

The ESOPs liquidity program is done before going public through the IPO because of SEBI regulations which state that there is a lock-in period of one year on options.

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Though this doesn’t apply to current employees, it does apply to former employees who won’t be able to exercise options for that period.

How are ESOPs taxed?

Employees get double-taxed in the current system; Once when the employee exercises the option to get their shares, and the second time when they sell those shares.

The first time happens because there is a difference between the share’s face value and its market price, with the market price usually being higher. This difference is treated as a perquisite and taxed.

What are the tax benefits of the program?

The program allows employees to claim a tax deduction under Section 80C of the Income Tax Act for the amount invested in ESOP shares, at a yearly limit of ₹1.5 lakh.