What is ESOP and what are the challenges in ESOP Implementation?

ESOP fully known as “Employee stock option plan” is one of the best mechanisms to reward employees and to attract the talent, this enables employees to participate in the financial success and long-term growth of the company. Indian Start-ups have been adopting the ESOP faster and rewarding their employees, however there are multiple challenges with respect to compliance being faced by the company while implementing the ESOP policy. 


What is ESOP


There are multiple complex definitions which includes exercise period, vesting period, exercise price, strike price and each one of this carries their own importance hence one should be very careful while implementing the ESOP policy in the organisation.

Let us see the definitions of the below mentioned terms.

Vesting: means the process by which the Option Holder is given the right to Exercise the Options granted to him in pursuance of this Plan.

Vesting Period : means the period from the date of Grant of Options till the period of option mentioned in the letter of grant issued by the company to the eligible employee.

Vested Option: means an Option in respect of which the relevant Vesting Period is over and which the Option Holder has become eligible to Exercise.

Grant Date: means the date of grant of any Options to eligible Employees under this Plan.

Exercise Period: means the period after Vesting within which the Option Holder can Exercise the Vested Option in pursuance of the Plan.


Exercise/ Strike Price: the Price which an employee will have to pay at the time of exercise of shares. 

Exercise: means the making of an application by the Option Holder to the Company for the issuance of Shares against the Vested Option in pursuance of the Plan.

Various dimensions of ESOP Policy:

1. Vesting cycle: Opinion on fixing the vesting cycle differs based on the stage at which organization is operating currently, organization at the early stage having less cash paying capacity to their employees would like to have monthly/ quarterly vesting cycle, however organization operating at the matured at stage would like to have annual vesting cycle. Reason is obvious one is not eligible to exercise the shares for which vesting cycle is not yet over hence employees mid of the year would not like to resign as they are in the mid of vesting cycle and would like to complete the cycle to exercise all the shares in the case of annual vesting cycle which is not in the case of monthly/ quarterly vesting cycle.

2.  Exercise period: Exercise period has tax incidence, so it would be prudent to have a longer exercise period, At the time of exercise of shares employees will have to pay Income tax under the head salary, tax computation would be based as under- (FMV on the date of exercise of shares – Strike price)* No of options being exercised. The tax liability at the time on the exercise of shares sometimes is in lakhs or even in crores without monetizing those shares, this provision of Income tax can utilized by the organization positively effectively by restricting the exercise period to 90 days, by restricting the timeline of exercise period, employer discourage the employee to resign as employee will have to pay heavy tax at the time of exercise without even monetizing it. Point to note here is that while the obligation to pay the tax is on employee however it is the duty of the employer to deduct TDS and pay the appropriate amount to government from employee salary. Hence it is important to have ample amount of notice period to cover TDS deduction part and remit the amount to government.

3.  Type of securities: It is important for the management to decide which type of equity is being offered to employees, the real intention behind ESOP is to provide maximum financial benefit to employees and but it is also important that important strategic decision of the company should not be diluted for the reason that one of the employee who is on the cap table does not want to vote in favor of the founder, hence sometime startup opts to issue “differential voting rights shares”- Shares without voting rights so as to pass the maximum advantage of financial benefit without limiting the right to take decision.

4.  Deciding right amount of strike price:- Strike price is the price which an employee will have to pay to the company to subscribe the vested shares, startups at the early stage would like to have it at Face value to pass on the maximum financial benefit however company at the matured stage would like to keep it at fair market value of the previous round at which company has raised funds, this ensures that the prior effort applied by the previous employees or the founders should not be passed on the new employees, the new employees only gets rewarded by the value addition made during his tenure and not of the preceding tenure.

5.  Treatment of ESOP option during strategic event: In the era of market consolidation, takeover, Merger and acquisitions, Liquidations: it is important to have a provision of these events in the ESOP policy and startups generally would like to opt for accelerated exercise rights to make sure that employees gets maximum financial advantage of the ESOP options while monetizing the shares.

Below are the points which a company must incorporate while implementing the ESOP Policy: 

1.  Differentiation between Good cause and bad cause.

2.  Vesting schedule and grant date. Companies Act 2013 prescribes to have minimum one year of time gap between the date of joining and grant date.

3.  Certain Discretionary powers with either ESOP committee or Board.

4.  Right of first refusal with the founder of Investors.

5.  Power of the Board to restrict the transferability of the shares to avoid any hostile takeover.

6.  Detailed process to exercise the shares along with the address to whom the communication needs to be sent.

Are we in a Stock Bubble ?

We will start the topic by asking the question that should we invest in today’s market?

Whether we should follow Michael Burry pessimistic approach or believe in investors like Cathie Wood Optimistic prediction about stock market? 

Currently in the context of Indian economy we are hitting all time high in stock market which is trading above 17500. The multiple of earnings that Indian stocks are trading at higher than its been historically, all this is happening post Covid and everyone of us is scared that on the one hand the virus is still spreading through the world and on the other side of the equation we have stock market which is not going down.

Investors like Michael Burry who is well known for predicting 2008’s Housing Bubble, warning people about stock market crash very soon by basing their decisions on analyzing metrics like Market Cap to GDP ratio.

What is Market Cap to GDP Ratio?

It is used to evaluate whether a particular given market is accurately valued in accordance with its historical average. When you take aggregate of all the S&P 500 company’s market capitalization divided by the GDP you get Market Cap to GDP ratio also known as Warren Buffett Metrics.

Market Cap to GDP ratio= SMC/GDP

(where SMC stands for Stock Market Capitalisation and GDP stands for Growth Domestic Product of a country)

 Stock market experts observe that when the Market cap to GDP goes above 100 it is a sign of a crash that has happened in 90’s DOTCOM Bubble and happened in 2008’s Housing Market Bubble.

Now so many people would say hey Market Cap to GDP ratio went up so you should sit on sideline and not invest in stock market. Market cap to GDP ratio jumped 20 years high in 2021. Indian market cap to GDP is currently around 104-105%, historically it was 80% of India’s GDP, the only time it traded on 100% of the India’s GDP was in FY 2008. The reason for this high is due to Corona, in 2020 countries like USA brought trillions of cash into the economy that money came to economy like India also because of which the stock market went up because of the excess liquidity market cap of all the listed company went up (numerator of the ratio went up). The GDP of India in last two quarter have declined massively (denominator of the ratio have gone down) so the entire ratio went high.

If we compare our economy with other more efficient economies, then in an economy like USA if Market Cap to GDP is between

50-75- it is undervalued

75-100- fair valued

Above 110 overvalued

But this is not applicable to Indian economy as India has historically been an economy driven by private businesses/ family-owned businesses and we do not have access to correct information about the business which led to miscalculation of earning and other major metrics. 

Also as per Aswath Damodaran, a renowned professor in the Stern School of Business at New York University, Market Cap to GDP is a bad metric to base our investing decisions specially during Covid situation.  In one of his interview he explained Since 2020 was an exception and most of the businesses were closed for atleast two quarters hence we are in an unusual times and in this situation Market Cap to GDP ratio will appear bloated so cannot be treated as a reasonable indicator. But we can make the sense of this ratio in a way by just looking at what that ratio was before the Covid period. If it was high then, then we can treat it as high now and vice versa.

The more acceptable metric to investor is price to earnings ratio i.e PE ratio, it is growth indicator and can be shown as below

                                         PE Ratio= P/E

where P (Numerator) stands for Price of the stock and E (Denominator) stands for Earning of the stock

      Currently nifty is estimated to be trading at over 20 times to the earning of FY 2022 which means the price of the stocks are higher than its earnings, historically we have traded probably maybe 17 times at best so we can say it's currently so high.  If we analyze the reason we can simply arrive at the conclusion that for majority of companies the earnings have gone down in 2020 because of Corona virus, people were not buying products a lot of companies were not producing, some industries like travel and tourism completely shut down, cinema companies like PVR, INOX and other multiplex chains had to close down their entire business. People in favor of doing investment in the stock market give explanations that when in 2021 and 2022 the earning improves, and everything get normalize the PE ratio would automatically come down (because the denominator would go up) so we do not have to worry about high PE ratio.

       If we trust investors like Cathie Wood's prospective who is well reputed investor of USA and has earned a lot from the stock market, she is very bullish about the market and optimistic for the future. She has explained three major points of the economy

     ·   Innovative business will drive out traditional businesses results in increasing GDP and declining market cap of big companies and that will somewhat stabilize the Market cap to GDP ratio.

    ·   Money will not actually flow from stock market to bond market, but it will happen vice versa. On this point Michael Burry and Cathie Wood looks in the complete opposite directions and they often argue each other on it. The reasoning behind Wood’s statement is that she believes bond market would continue to perform poorly in the future and investors keep finding stock market attractive over the bond market. If we analyze the reasoning in Indian market context it is very much true by seeing FDs and other secured debt instruments interest rate etc.

·      Inflation is not a concern: she arguments that asset price inflation i.e if the stock market is gone up it is not going to stay in that manner always because of innovative companies like Uber, CoWork are coming into the picture. Innovative companies like these cut down the prices that are existing, so they cut down the inflation also

      After discussing both the approaches we can say that Mr. Burry is playing on Historical Data and Tools which indicate a crash is going to happen and Ms. Woods is betting on the future and the evolution of Disruptive companies

       What might slow down the rally?

     When the Indian bond market offers very attractive yield than its existing rate then the money would flow from stock market to bond market or in the worst-case scenario “Knee Jerk Reaction” takes place. Now these yield adjustments or tapering from the central bank will take place over the long period of time till than there is no point of panicking or stop investing resulting in sitting on pile of cash. If everybody thought that the correction will happen then the correction would have happened by today. 

    (  “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch)

        Investments are always about alternatives if we pull back our money from stocks where are we going to invest it?

- FDs? It offers much lessor interest rate and if we consider inflation in that scenario, we are infact losing our money because inflation rate is higher than FD interest rate in real.

 - Real Estate? It is overvalued as well.

      Ultimately, we will have to invest our money in businesses atleast they are taking the advantage of the inflation. When the extra money is flushed into economy somehow businesses or banks get the money at the end which results to increase in their earnings and their share price goes up as well.

What can we do to protect our investment from the uncertainty in future?

1.       We can hedge our investment by buying other alternative like Crypto currency

2.       We can diversify our investment in different segments

3.       We can invest in companies that will grow with middle class India because many experts   see India becoming more prosperous in future.

4.       We can invest in mutual fund or invest on expert’s advice.

5.       Stay away from overvalued stocks.


What is Hedging and Speculation with Option?

Options are very handy derivative instruments in the financial market giving its owner right to Buy or Sale an Underlying at a Fixed Price on or before the Specified Period. An Option gives to the holder of it the right to do something but the holder does not have to Exercise this right compulsorily. Options can either be American or European. An American option can be exercised at any time before the Expiry of Exercise Period but European Option can be exercised only at the end of the Exercised Period. It’s nothing to do with the Geographical location. Type of Option in the Financial Market is Call Option and Put Option. Call Option give its Owner the right to buy an Underlying at a Fixed Price Known as Exercise Price before the specified Period Known as Exercise period Simultaneously Put Option Gives the Owner the right to sell an Underlying at Fixed Price before the Exercise Period at an Exercise Price. In Each Option there are two Parties first the Seller (Who writes the option) and other one is buyer of option (Who has the right to Exercise the option).

              The Call Option is Valuable when the Spot Price of an underlying is above the Exercise Price(In the Money) because in case if Exercise Price is above the Spot Price (Out of Money) then there is no rational to Exercise the option i.e. to buy the assets by exercising the option which has less worth in the open market. The Maximum profit to the holder of call option can be unlimited i.e. the Positive Difference between the Exercise Price and Spot Price on the date of Exercise the option but in the Reverse situation, The Maximum loss to the holder of call option will be the amount paid to seller of option at the time of purchasing the option typically Known as the Premium simultaneously the Seller of the option can have the Profit only in that case if the exercise Price of the option is below the spot Price because in this situation the holder of the option will not exercise the option and the amount received by the seller of the option at the time of sale(Premium) will be the Profit to the seller. The Maximum Profit to the seller can be the amount received as Premium but in the reverse situation the holder will Exercise and the maximum loss to the seller can be the negative difference between  the Exercise Price and Spot Price of an underlying. Finally the crux is that the amount of Profit to the holder will always be equal to the amount of loss to the seller and vice versa because in the option there is no involvement of intermediate Party as in the plain Vanilla Interest rate swap. 

         The Put Option is Valuable if the Exercise Price of an underlying is more than its spot Price (In the Money) in case if the Spot Price is more than Exercise Price (Out of Money) then there is no rational to Exercise the option i.e. to sale an underlying by exercising the option which has more worth in the open market

The Maximum profit to the holder of Put option can be up to strike pricewise. the negative Difference between the Exercise Price and Spot Price on the date of Exercise the option but in the Reverse situation, The Maximum loss to the holder of Put option will be the amount paid to seller of option at the time of purchasing the option typically Known as the Premium simultaneously the Seller of the Put option can have the Profit only in that case if the exercise Price of the option is above the spot Price because in this situation the holder of the option will not exercise the option and the amount received by the seller of the option at the time of sale(Premium) will be the Profit to the seller. The Maximum Profit to the seller can be the amount received as Premium but in the reverse situation the holder will Exercise and the maximum loss to the seller can be the positive difference between the Exercise Price and Spot Price of an underlying. Finally the crux is that the amount of Profit to the holder will always be equal to the amount of loss to the seller and vice versa.

Theoretically the value of the call option is the amount by which the Spot Price exceeds the exercise Price i.e. the call option value increases for every increase in the spot price, but in case of put option the value of option is the amount by which the Exercise Price Exceeds the spot Price, in fact the Value of put option increases for every Decline in the value of Spot Price. However the Value of Option depends up on the following factor.

Exercise Price 

Maturity Period

Stock Price

Variability of the Underlying Assets

Interest Rate

As we discussed earlier the Value of Call Option is the Positive Difference between the Exercise Price and Spot Price the lower will be the Exercise Price the higher will be the value of call, if other thing being equal the higher is the maturity Period the higher will be the value of option, In Case of Stock Price, the higher is the Stock Price the higher will be the Value of Call option, The Greater the Variability in the price of Stock the greater will be the Value of Call option because the higher the variability in the stock Price gives a higher Probability of  abnormal higher return. Value of call option is positively related with Interest rate because the ability to delay Payment is more valuable when interest rate is high and less valuable when interest rates are low.

The Effect of three factors on put option is opposite in case of call option(Stock Price, higher the stock Price the lower will be the value of put option, The Value of Put option with higher Exercise Price is greater and interest rate are adversely effected the value of put option.)


Combinations of Options are many times used by the market trader (Speculation, Hedging, and arbitrage) to eliminate the risk of fluctuation in the spot price of an underlying. Buying a Stock and buying a Put option will eliminate the risk of lower side fluctuation i.e. in any case the value of the portfolio will always be equal to the Value of Portfolio at the time of purchase of shares and option, because if share price is greater than exercise Price the put option is worthless and value of combined position will always be equal to the value of common stock but instead the exercise Price is grater then Spot Price the decline in the value of share will exactly set off the rise in the value of put this strategy is known as Protective put strategy. 


Buying a stock with put Option has same pay off in case buying the Zero coupon Bond with call Option. Because in the case of Zero Coupon Bond it is Certain to receive the amount of face value of the Bond at the time of maturity so the question of Decline in the Value does not arise and now we have the Call option on Zero Coupon bond so if the Value of zero Coupon Bond increases the Value of Call option will rise and the combined Value will be equal to Spot Value of Zero coupon Bond so both the strategy has same cash flow, same return, so applying the Put Call parity Approach we can say that both the Strategy must have same cost otherwise the Possibility of Arbitrage will arise.  

In Equation Form,

               Price of Underlying+Price of Put = Price of ZCB+Price of Call,

If we rearrange the Formula then,

  Price of Underlying= Price of ZCB+Price of Call- Price of Put,

In practical world right side position of the investor is known as long call short put combo(LCSP Combo) at this position we can say that we can buy one share at the exercise price either at our own will or forcefully, this means we have the amount of exercise price and call option if the value of ZCB increases then we will exercise call option but if the value of ZCB decreases then the buyer of put option will exercise and we have to buy the same by paying the exercise price.

This situation of investor is known as purchase of Synthetic Stock.

Price of Underlying- Price of Call = Price of ZCB - Price of Put

The Position of the left hand side of the investor is known as Covered Call Strategy.

The Option Can is viewed as an Instrument for Speculation by making Various Strategy like Spread Straddles, Strip, and Strap.

Spread is the Combination of two similar type of Option the spread can be prepared by assuming the market behavior of a Particular type this means the market is raising or falling or constant with time but if the assumption gone wrong then also investor will have limited loss not unlimited. 

In Case of bull Call Spread that means we have assumed that the market is raising in this type of Strategy the investor need to buy a call Option with lower Strike Price and need to sale a Call option with a higher strike Price the reason behind this is a Call option with a higher strike Price will have low value as Compare to high strike Price option as we are selling High Strike Price Option so we will receive less amount of Premium and will need to Pay high amount of Premium because we are purchasing low strike Price option so the net effect is that we are payer of Premium. Now as per our assumption if the market is raising then the Maximum Profit to the option buyer will be the Difference between both the option strike Price less net Premium paid but if the market is falling then both the call option will be Value less and the loss to the option Buyer will be the amount Paid as Premium, if the market Price falls between both the Strike Price then the Profit to the Option Buyer will be the Positive Difference between spot price and Strike Price of the option. Now in case of Bull Put option Investor need to sell the option with a higher Strike Price and to buy the option with a lower Strike Price because the Put option with higher Strike Price will have more Value and put option with Lower Strike Price will have low value as Compare to high strike Price and net effect to the investor will be the receiver of Premium. As Per Our assumption if the Spot Price of the underlying is raising then both the Put option will be Value Less and the amount received as Premium will be the Profit to the option writer now if the assumption gone wrong the Spot Price of the underlying is reducing   and the maximum loss will be the difference between both the option Strike Price less the amount received as premium.

In Case of Bear Call or Put option we are assuming that the market Price of the Spot is declining to make bear call spread in this type of market we need to sale a option with low strike Price and to buy a option with a high strike price, the call option with a high strike price will have low value and call option with a low strike Price will high value and we are selling low strike price so in this spread Investor will be net receiver of premium as per our assumption the spot price is reducing  and it goes below the strike price of lower call option then both the call option will be value less and the amount received as premium will be the Profit to the option writer and but if the spot price lies above the lower strike Price call option but below the higher strike Price call option then  the loss  to the investor will be the difference between lower Strike Price option and spot Price but if the Spot price lies above both the option strike price then the maximum loss to the option writer will be the difference between both the strike price. In the case of Bear put option spread investor need to sale low strike Price put option and buy high Strike Price put option because low strike price put option will have less value as compare to high strike price and we are selling low strike price put option so we will pay more as compare to receive in this situation investor will be the net payer of Premium. Now as Per our assumption the market Price of the underlying will go down and if goes down below the underlying Price of both the option then the maximum profit to the option writer will be the difference between both the option strike Price less the amount Paid as Premium but if the spot Price of the underlying is above the lower strike price of option but below the higher strike price option then the difference between spot price and higher strike price of option will be the profit to the option writer but if spot price lies above the strike price of both the option then the maximum profit to the option writer will be the amount received as premium.


In case if the market is Constant then investor needs to make butterfly spread. There can be two type of butterfly spread long or short butter fly to make long butterfly investor need to sell two call options with same strike price and need to buy two option but different strike Price. Basically it is a combination of Bear or bull call option. However if the investors want to reduce the cost of investment then with slight modification investor can use long condor or short condor strategy, in the long condor we will sale two option at the intermediate strike price but at two different value and vice versa in the short condor.

The Strategy of Straddle is the combination of Call option and Put option. There can be two type of straddle long straddle or short straddle. The long straddle is profitable if there significant movement in any direction of spot price. Short straddle is valid when there is no movement in the spot price.

In case of Strip Strategy the investor need to create a Straddle and to buy one more call option. This Strategy is profitable when there is probability of high downward movement in the spot price with some protection from upward movement.

In strap Strategy the investor need to create a Straddle and to buy one more put option. This Strategy is profitable when there is probability of high upward movement in the spot price with some protection from downward movement. Options can be used for any type of market situation but with confidence.    

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