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

Zenith Pharma Ltd, a listed company, plans an Employee Stock Option Scheme under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. A manager asks what an 'employee stock option' means. Which description is correct?

An employee stock option is a right, not an obligation, granted to an eligible employee to purchase or subscribe to the company's shares at a future date at a pre-determined exercise price. The employee may choose to exercise or let the option lapse.

  1. AA right, but not an obligation, given to an eligible employee to purchase or subscribe to the company's shares at a future date at a pre-determined priceCorrect
  2. BAn obligation on the employee to subscribe to the company's shares at the market price on the grant date
  3. CAn allotment of shares to the employee at no cost in lieu of know-how provided
  4. DA loan given by the company to the employee to buy shares from the open market

Explanation

An option is a right without obligation to purchase or subscribe to shares at a future date at a predetermined price (the exercise price). It is not an obligation, not a free allotment (which is closer to sweat equity or bonus) and not a loan arrangement.

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