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

Meridian Pharma Ltd, a listed company, wants to grant employee stock options to its permanent employees under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. Which of the following correctly describes the nature of an employee stock option?

An employee stock option is a right, but not an obligation, granted to an employee to apply for the company's shares at a predetermined exercise price on a future date. The employee may choose to exercise or let the option lapse, so there is no compulsion to subscribe.

  1. AA right, but not an obligation, given to an employee to apply for the company's shares at a predetermined price in the futureCorrect
  2. BAn obligation on the employee to subscribe to the company's shares at a fixed price
  3. CA right given to the employee to receive shares free of cost on joining
  4. DA loan given by the company to the employee to buy shares from the open market

Explanation

An employee stock option gives the employee the right, not the obligation, to apply for shares of the company at a pre-determined price. Option B is wrong because there is no obligation to exercise. Options C and D describe a free allotment and a loan, which are not features of an option.

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