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B. Venkatesh

SATYAM Computer has informed the stock exchange that it has allotted shares under the stock option plan. We often use stock option and employee stock ownership plans in the US (popularly called ESOPs) interchangeably though they are different. What is the difference between the two?

Under a stock option plan, a company assigns options to its employees. The option gives the employees the right to buy shares at a specified price during a specified period. These options are not traded on the stock exchanges.

A company may, for instance, grant each employee the right to buy 500 shares at Rs 100 after two years. Employees will exercise their options only if the stock price in the secondary market is higher than Rs 100. If the secondary market price is lower, the option will be allowed to lapse. Stock options are the typical form of employee benefit plan in India. ESOPs refer to the special kind of incentive structure where a company creates a trust. It makes regular contributions to the trust in the form of shares or cash. If contribution is made in cash, the trustee-manager buys the company's shares from the secondary market.

Each employee has a separate account to which the shares are credited. When an employee leaves the company, he receives the shares in his account. If the shares are not traded in the secondary market, the company has to buy back the shares from the employee at a fair price. This plan is eligible for significant tax benefits in the US.

To add to the complexity, some companies also have employee stock purchase plan. Under this plan, the company sells shares to its employees at a discount to the market price. Importantly, the company deducts the purchase price of these shares every month from the employee's salary account.

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