Capital Market and Securities Laws · Share Based Employee Benefits and Sweat Equity

Employee Stock Purchase Scheme and Stock Appreciation Rights

Updated 11 October 2026 · Fact-checked

An Employee Stock Purchase Scheme (ESPS) lets employees buy shares of the company directly, and the shares carry a minimum one-year lock-in from allotment. Stock Appreciation Rights (SAR) pay the employee the rise in share value, in cash or shares, without any purchase. Answer by stating the scheme, its conditions, pricing, lock-in and disclosures.

Understand Employee Stock Purchase Scheme and Stock Appreciation Rights

Companies use share based employee benefits to reward staff and keep them. Under the SEBI framework for share based employee benefits, the main schemes are the Employee Stock Option Scheme (ESOP), the Employee Stock Purchase Scheme (ESPS), Stock Appreciation Rights (SAR), the General Employee Benefits Scheme (GEBS) and the Retirement Benefit Scheme (RBS). Each one links the employee's reward to the company's shares in a different way.

ESPS is a scheme where the company offers shares to employees, as a part of a public issue or otherwise. The employee pays for the shares and becomes a shareholder on allotment. There is no option to wait and decide later, as there is in an ESOP. ESPS shares carry a minimum lock-in of one year from the date of allotment. If the shares are allotted under an ESPS in a public issue, the lock-in does not apply to them (as per the SEBI SBEB regulations).

SAR is a right given to an employee to receive the appreciation in the share price over a base price, instead of buying shares. The employee does not pay an exercise price. The company settles the gain, either in cash or by issuing shares of equivalent value. The settlement mode is decided in the scheme.

The key difference from ESOP: an ESOP gives the employee an option to buy shares at a fixed exercise price after vesting. An ESPS requires actual purchase at the time of the offer. A SAR gives only the value of the gain, with no purchase needed.

GEBS and RBS use the company's shares or a trust holding them to give employees general benefits or retirement benefits. They are usually run through a trust that buys shares from the market or receives them from the company. Treat them as 'other schemes' in your answer and stress the trust route and the disclosure and compliance conditions.

The rules are mainly in the SEBI regulations on share based employee benefits and sweat equity, together with the Companies Act, 2013. Two Companies Act rules matter here. Section 67(2) bars a public company from giving financial assistance for the purchase or subscription of shares in the company or its holding company, with exceptions for employee schemes. Separately, section 67(1) bars a company from buying its own shares unless the resulting reduction of share capital is effected under the Act. Use section 67(2) when a question involves the company lending to employees for ESPS.

Key rules to remember

ESPS in one line: ESPS = employees buy shares at the offer price → allotted → minimum one-year lock-in from allotment; Employee pays and becomes a shareholder. No option stage, unlike ESOP. The lock-in does not apply to shares allotted under ESPS in a public issue.
SAR payout: SAR payout = (Market price on exercise − Base price) × Number of SARs; Payable in cash or in shares of equal value, as the scheme provides. Payout is nil if market price is not above base price.
Shares issued on share-settled SAR: Shares issued = SAR payout ÷ Market price on settlement date; Use this only when the scheme settles in shares. Round as the scheme states.
Discount on ESPS: Discount per share = Market price − Offer price; Applies only if the shares are offered below the market price. It is then the benefit to the employee and is treated as employee compensation cost in accounting.
Financial assistance bar (Companies Act, section 67(2)): No public company may give financial assistance, directly or indirectly, for purchase or subscription of shares in the company or in its holding company; Exceptions in section 67(3): (a) a banking company lending in the ordinary course of its business; (b) money provided under a scheme approved by the company through special resolution, in the prescribed manner, for purchase of or subscription for fully paid-up shares in the company or its holding company, where the shares are held by trustees for the benefit of employees or by the employees; (c) loans to employees (other than directors or key managerial personnel) up to six months' salary or wages to buy or subscribe for fully paid-up shares in the company or its holding company, to be held by them by way of beneficial ownership.
Penalty for breach of section 67: Company: fine ₹1,00,000 to ₹25,00,000. Officer in default: imprisonment up to 3 years and fine ₹1,00,000 to ₹25,00,000; Section 67(5). State both limbs.

How to solve Employee Stock Purchase Scheme and Stock Appreciation Rights questions

Use this method for any question on ESPS, SAR or other schemes, whether theory or numerical.

1Identify the scheme from the facts: purchase of shares (ESPS), payment of share price gain (SAR), or benefits through a trust (GEBS or RBS).
2State the meaning of the scheme in one or two lines, in your own words.
3List the conditions: shareholder approval of the scheme by special resolution, with separate special resolutions for specific cases such as grants to employees of subsidiary or associate companies and trust-route schemes; who may take part; and the disclosures required.
4Deal with pricing: the offer or base price, the discount if any, and how the benefit is measured.
5State the lock-in for ESPS shares (minimum one year from allotment, not applicable to shares allotted under ESPS in a public issue) and any restriction on transfer, and say what happens to SAR on exercise or lapse.
6If numbers are given, compute the SAR payout or discount per share first, then the total.
7If the company lends money to employees, test it against section 67 and its exceptions.
8End with a clear conclusion that answers the exact question asked.

Quickest way: Three-line scheme check

When to use it: Use when a short question asks you to distinguish or identify schemes, or when time is short on a long question.

Does the employee pay and get shares now? It is ESPS.
Does the employee get only the gain over a base price? It is SAR.
Does a trust hold shares for general or retirement benefits? It is GEBS or RBS.
For a number, write: gain per right = market price − base price, then multiply by the number of rights.
If any loan to employees appears, check section 67(3)(c): employees only, not directors or KMP, up to six months' salary or wages.

Common mistakes in Employee Stock Purchase Scheme and Stock Appreciation Rights

Treating ESPS as an option scheme.
Students mix it up with ESOP because both are employee share schemes.
Fix: Remember that in ESPS the employee buys the shares at the offer stage. There is no option period or exercise decision.
Saying SAR always results in shares being issued.
The word 'rights' suggests ownership.
Fix: SAR pays the gain. Settlement may be in cash or shares as the scheme says. Write both.
Forgetting the lock-in for ESPS shares.
Students remember vesting from ESOP and assume the same applies.
Fix: Always state that ESPS shares carry a minimum one-year lock-in from the date of allotment, with no transfer during it. Add that the lock-in does not apply to shares allotted under ESPS in a public issue.
Computing SAR payout using the exercise price.
In ESOP there is an exercise price, so students look for one in SAR too.
Fix: Use base price. Payout = (market price − base price) × number of SARs. If the market price is below base, payout is nil.
Applying section 67 loan exception to directors or to any amount.
Students recall only 'loans to employees are allowed'.
Fix: State all conditions: persons in employment other than directors or key managerial personnel, amount not above six months' salary or wages, for fully paid-up shares of the company or its holding company held by beneficial ownership.
Quoting only the fine under section 67(5).
Students forget the imprisonment limb for officers in default.
Fix: Give both: company fine of ₹1,00,000 to ₹25,00,000, and officer in default up to three years' imprisonment plus the same range of fine.

Worked examples

Example 1

Anand Textiles Ltd. grants 2,000 SARs to an employee with a base price of ₹150. On exercise, the market price is ₹210. The scheme allows settlement in cash. Compute the payout. If the scheme instead provides settlement in shares at the market price on exercise, how many shares are issued?

Show the solution

Gain per SAR = ₹210 − ₹150 = ₹60.
Total payout = ₹60 × 2,000 = ₹1,20,000.
For share settlement, shares = ₹1,20,000 ÷ ₹210 = 571.43.
Shares cannot be fractional, so the scheme's rounding rule applies. Rounding down gives 571 shares.

Answer: Cash payout is ₹1,20,000. Under share settlement, about 571 shares are issued (571.43 before rounding, as per the scheme's rounding rule). The employee pays nothing in either case.

Example 2

Meera Pharma Ltd., an unlisted public company, proposes to lend ₹3,00,000 to an employee, whose monthly salary is ₹40,000, so that she can buy fully paid-up shares of the company. She is not a director or KMP. Is the loan permitted?

Show the solution

Provision: section 67(2) bars a public company from giving financial assistance, directly or indirectly, for the purchase or subscription of shares in the company or its holding company.
Exception: section 67(3)(c) allows loans to employees other than directors or KMP, up to six months' salary or wages, to buy or subscribe for fully paid-up shares in the company or its holding company, to be held by beneficial ownership.
Limit = ₹40,000 × 6 = ₹2,40,000.
The proposed loan of ₹3,00,000 is higher than ₹2,40,000 by ₹60,000.
So the exception does not cover the full loan.

Answer: The loan of ₹3,00,000 is not permitted because it exceeds the section 67(3)(c) limit of ₹2,40,000. A loan up to ₹2,40,000 would be allowed. If the company breaches section 67, it faces a fine of ₹1,00,000 to ₹25,00,000, and every officer in default faces imprisonment up to three years and a fine in the same range.

Exam tips

For 'distinguish' questions, write a short table-like list in points: purchase, price, payment, settlement and lock-in for ESOP, ESPS and SAR.
In numerical questions, show the gain per right first, then the total. Marks go to the method.
Link to section 67 whenever a company funds employees to buy shares, and give the exact limits.
Open each answer with the scheme's meaning, then conditions, then a conclusion. This matches the ICSI style.
Learn the full list of five schemes (ESOP, ESPS, SAR, GEBS, RBS) so you can name them in a short note.

Practice questions from Share Based Employee Benefits and Sweat Equity

Employee Stock Purchase Scheme and Stock Appreciation Rights: frequently asked questions

What is the lock-in period for ESPS shares?

Under the SEBI share based employee benefits regulations, ESPS shares carry a minimum lock-in of one year from the date of allotment, and they cannot be transferred during it. If the shares are allotted under an ESPS in a public issue, the lock-in does not apply to them.

What does SAR mean and what are its features?

SAR means Stock Appreciation Rights. The employee gets the rise in share price over a base price, without buying shares. Settlement may be in cash or in shares, as the scheme states.

What is the difference between ESOP and SAR?

In an ESOP, the employee gets an option to buy shares at a fixed exercise price after vesting and must pay to do so. In a SAR, the employee pays nothing and receives only the gain over the base price. SAR may be settled in cash, so it does not always lead to new shares.

What is a general employee benefit scheme?

It is a scheme where the company uses its shares, often through a trust, to give general benefits to employees. A retirement benefit scheme works the same way but for retirement benefits. Both are covered along with ESOP, ESPS and SAR in the share based benefits framework.

Can a public company lend money to employees to buy its shares?

Yes, within limits. Section 67(3)(c) of the Companies Act, 2013 allows loans to employees, other than directors or key managerial personnel, up to six months' salary or wages for buying or subscribing for fully paid-up shares in the company or its holding company. Anything beyond this, unless another exception applies, is barred by section 67(2).