Employee Stock Purchase Scheme: How ESPS Differs From Stock Options

An employee stock purchase scheme, or ESPS, is the plainer cousin of the stock option. The company offers its people actual shares, usually at a price it sets, and the employee pays and owns them. No vesting wait, no option that may or may not be worth exercising. You buy, and you hold. When a listed company announces an ESPS, it adds new shares to its equity base, and as shareholders we should know exactly what that means for us and for the employees on the other side.

This guide walks through how SEBI defines an ESPS, the rules on approval, pricing and lock-in, how it differs from an ESOS (employee stock option scheme), and what a shareholder should look for in the notice. The rule references come from the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, as amended up to December 4, 2025. The rupee examples are hypothetical and exist only to show the arithmetic.

What an employee stock purchase scheme is under SEBI rules

SEBI’s regulation 2 defines an ESPS as a scheme under which a company offers shares to employees, either as part of a public issue or otherwise, or through a trust, and that trust may buy shares in the secondary market for the scheme. Compare that with an ESOS, which the same regulation describes as a scheme under which a company grants employee stock options, directly or through a trust.

That one word is the whole difference. An option is a right to buy later. An ESPS share is a share now.

Who counts as an “employee” also matters, because it decides who can participate. Under the regulations, an employee can be a person designated by the company working in India or abroad, or a director (whole-time or not, including a non-executive director who is not from the promoter group), but not an independent director. Employees of group companies, subsidiaries, associates and the holding company can be included. Two groups are left out:

• an employee who is a promoter or belongs to the promoter group, and
• a director who, directly or indirectly, holds more than 10% of the company’s outstanding equity shares.

So an ESPS is not a back door for promoters to pick up cheap stock. It is meant for the people running the business day to day.

ESPS vs ESOS: the practical differences

On paper both are “share-based employee benefits”. In the hands of an employee they behave quite differently.

The option holder point is spelt out in regulation 19: an employee has no right to dividends, votes or any shareholder benefit on an option until shares are actually issued on exercise. An ESPS participant, by contrast, holds ordinary shares from allotment, subject to the lock-in.

An option lets an employee wait and see. An ESPS asks them to put money in first, which is why the price and the lock-in matter so much more.

Approval: shareholders must vote on it

No ESPS can be offered to employees unless shareholders approve it by a special resolution in a general meeting (regulation 6(1)). A special resolution needs a higher bar of support than an ordinary one, so the plan has to carry a large share of the votes cast. The explanatory statement sent with the notice must carry the disclosures listed in Schedule I of the regulations.

Some things need a separate resolution on top of that. Two are worth knowing as an investor:

• if the scheme is to be funded by secondary acquisition, meaning a trust buying shares from the market, the resolution has to state the percentage that can be bought, and
• if identified employees are to get shares or benefits in any one year equal to or more than 1% of the issued capital (excluding outstanding warrants and conversions) at the time of the grant.

The administration sits with a compensation committee, which can be the board’s nomination and remuneration committee (regulation 5). It decides who is eligible (regulation 4), sets the detailed terms, and has to frame policies so the scheme does not breach insider trading or fraud rules. That last point is not paperwork. Employees often sit on price-sensitive information, and buying shares under a scheme does not exempt them from insider trading rules.

Pricing and the one-year lock-in

Here the ESPS rules are short, and that brevity is telling. Regulation 22 says three things:

1. The company may set the price of ESPS shares, as long as it follows the accounting policies in regulation 15. Those point to the accounting standards under section 133 of the Companies Act, 2013, including the Guidance Note on Accounting for Employee Share-based Payments.
2. Shares issued under an ESPS are locked in for at least one year from the date of allotment. The lock-in falls away on the employee’s death or permanent incapacity, and time already served on shares of a merged company counts towards it.
3. If the ESPS is part of a public issue and employees get shares at the same price as the public, there is no lock-in at all.

So the ESPS rules set no floor price, and a company can offer shares at a discount to the market. That discount is a real cost, and it gets accounted for. Schedule I of the regulations also makes the company disclose, for every ESPS with allotments during the year, the date of shareholder approval, the number of shares issued, the issue price and the lock-in period, which is one reason to read the share-based payment disclosures alongside results. Our guide on how to analyse quarterly results of a company covers where such line items usually sit.

A worked example: what the employee pays and risks

Take a hypothetical listed company, XYZ Ltd, trading at ₹500. It runs an ESPS at ₹400 a share, and an employee, Rohan, buys 200 shares.

• Amount paid: 200 × ₹400 = ₹80,000
• Market value on allotment: 200 × ₹500 = ₹1,00,000
• Paper gain on day one: ₹20,000, which is a 20% discount to the market price, or a 25% gain on the money he put in

Now the lock-in bites. Rohan can’t sell for a year. Suppose the stock drifts to ₹380 by the time the lock-in ends. His 200 shares are worth ₹76,000, so he is ₹4,000 below what he paid, despite having bought “at a discount”.

Run the same numbers as an ESOS. Rohan gets 200 options at an exercise price of ₹400, vesting after a year. If the stock is at ₹380 when the options vest, he does nothing. Unless he paid something at grant, his loss is zero. If the stock is at ₹600, he pays ₹80,000 and gets shares worth ₹1,20,000.

That asymmetry is the real story. An ESPS puts the employee’s money at risk the same way it puts ours at risk. Some would argue that is exactly the point: it aligns staff with shareholders more tightly than options, which only reward the upside.

A discount on day one is not a profit. With a one-year lock-in, the employee carries the same market risk as any other shareholder.

What it means for existing shareholders

When an ESPS is met by issuing new shares, the share count goes up. Take XYZ again. Say it has 10 crore shares outstanding and allots 10 lakh shares under the ESPS. That is 1% more shares, so every existing holder’s stake shrinks by roughly 1% in proportion. If the shares go out at a discount, the company also collects less cash than it would have raised at market price.

Is that bad? Not automatically. A company that keeps good people may well earn that back many times over. But a few checks help:

• Size. How many shares, as a percentage of current equity? One small scheme is noise. Repeated schemes every year add up.
• Discount. A deep discount is a larger transfer of value from shareholders to staff, and a larger expense in the books.
• Who gets it. A broad-based scheme across staff reads differently from one concentrated among a few senior names, which is also when the 1% separate-approval rule kicks in.
• Funding route. New issue dilutes. A trust buying from the market does not add shares, but it uses company money.

Listing is not a hurdle either. Regulation 10 says shares issued under a scheme are to be listed immediately on all exchanges where the existing shares trade, once the company files the required statement and gets in-principle approval.

ESPS through a trust

Many companies run their schemes through an employee welfare trust. SEBI puts guardrails on this route under regulation 3:

• secondary acquisition by the trust in a financial year can’t exceed 2% of the company’s paid-up equity capital as at the end of the previous financial year,
• shares bought in the secondary market have to be held by the trust for at least six months, except in specified cases,
• the trustees cannot vote on shares the trust holds, and
• shares held by the trust are shown as “non-promoter and non-public” and do not count towards the minimum public shareholding of 25% under the Securities Contracts (Regulation) Rules, 1957.

That last point catches people out. A trust holding is not public float, even though no promoter owns it.

ESPS in a PSU bank or a public issue

ESPS also turns up in a different setting: large public sector companies and banks that want to widen their shareholding. Offering shares to a big workforce is one way to add holders. We covered one such case in our report on the IOB ESPS approval.

When an ESPS forms part of an IPO or follow-on offer, it overlaps with the employee reservation portion. If employees get the same price as the public, regulation 22(3) waives the lock-in. Our explainer on the employee quota in an IPO goes through the bid limits and discount rules that apply in that case.

ESPS vs sweat equity

The same SEBI regulations also govern sweat equity, which can look similar. The difference is what the employee gives. With an ESPS, the employee pays cash for the shares. With sweat equity, shares are issued for know-how, intellectual property or value additions, and they come with their own caps, pricing rules and lock-in. Our guide to sweat equity shares covers that side.

A quick checklist when a company announces an ESPS

1. Read the notice of the general meeting. The explanatory statement has to set out the scheme details, including how many shares, who is eligible and how the price will be fixed.
2. Work out the dilution yourself: new shares divided by current outstanding shares.
3. Compare the scheme price with the market price around the record date.
4. Check whether it is a new issue or a trust buying from the market.
5. In later annual disclosures, check the shares actually issued under the ESPS and the price they went out at.

An ESPS is one of the more honest ways to pay staff in equity. They put money in, they wait at least a year, and they ride the same price swings we do. For a shareholder the question is never whether it exists. It is how big it is, how cheap it is, and how often it comes back.

Disclaimer: This article is for education only and is not investment, tax or legal advice. The examples use hypothetical numbers. Scheme terms and tax treatment vary, so read the company’s own disclosures and consult a registered adviser before making decisions.