ESOPs (Employee Stock Ownership Plan) are no longer a foreign concept in the Indian market since many reputable companies offer them. This is a compensation plan offered by employers to their employees. The underlying concept is to retain talented employees by offering them a chance to buy shares of the company they are working for. It is an organization's way of rewarding hard-working employees for their dedication.
What is ESOP financing?
In ESOP financing, financial institutions offer loans to employees to help them exercise their option to purchase the shares allotted to them through ESOPs. In such situations, employees do not generally use their money or investments. Owning ESOPs are an effective way by which employees can directly take part in the company’s success Holding shares also enable the employees to reap financial benefits because they can sell off the shares allotted to them through ESOPs at higher rates.
Through ESOP financing, also called ESOP funding, an employee gets an option to avail funds against shares allotted to them without waiting for the vesting period to end. They can use the loan facility to buy and hold equity shares of their employer’s company and sell off the shares anytime they want to create wealth. Therefore, ESOP financing is often described as a quick way to avail funds.
The loan amount granted against ESOPs usually depends on the grant price, market price, and vesting period of the ESOPs.
How does ESOP funding work?
ESOPs are usually set up as trusts, and ESOP financing can be described as a loan facility. This provision is available against shares an employer has granted or allotted in their employee’s name. Allotments depend greatly on the employer's discretion.
After the employer has completed the allotments, ESOPs will remain in the trust fund until the vesting period. After completing the vesting period, the person holding the ESOP can exercise their options, such as buying the shares.
Generally, people receive an allotment letter that mentions the details of the number of shares allotted, and the timeframe during which they can exercise the option.
Why should a borrower consider ESOP financing?
Here are the benefits of ESOP financing:
- Loan against ESOPs is an invaluable financing option that swiftly makes money available to invest in a significant amount of company shares.
- By taking a loan against ESOPs, employees can exercise the option to buy many shares allotted to them through ESOPs. Then, they can sell the shares to repay the loan and pocket the surplus profits.
- The interest rates and other repayment terms of a loan against ESOPs are usually favourable due to the secured nature of these loans.
- Some financial institutions may offer short tenure for ESOP loans allowing borrowers to pay low interest.
Important points regarding how to avail ESOP financing
Check the tips provided below to find the right lender for a ESOP Financing:
- Lenders usually offer ESOP financing only for companies that are listed on reputed and established stock exchanges.
- The company shares that an individual wish to purchase will be held in a Demat account as securities unless an individual has fully repaid the loan.
- ESOP financing will cover both the cost of shares and the prerequisite tax payable. Keep this point in mind when looking for a lender to secure ESOP financing.
- ESOP financing involves margin requirements because most lenders provide loans for up to a percentage of the share’s current market price.
- ESOP financing is associated with low-interest rates and flexible repayment terms and conditions. But remember that loan tenures will vary depending on the lender.
Any Indian citizen between the ages of 18 years to 70 years can apply for an ESOP financing. One can avail of a loan up to Rs. 175 crore, depending on the valuation of the ESOPs, market conditions and the financial institution. However, the eligibility criteria shall vary and shall be subject to change at a sole discretion of each financial institution.
Another important thing that loan applicants should know is that many financial institutions offer pre-approved loans. These offers allow loan applicants to avail credit facility instantly when they need it. One needs to enter some basic information on the official web portal of a financial institution to check his/ her eligibility for such pre-approved loan offers.
