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Author - Associate Tarvinder Kaur

When the company issues options to buy shares to an employee with the objective to encourage the employee stay remain in the company for a longer term. By granting shares to employees by employer, it will give more benefits to employees. For granting of shares, employer will plan a vesting schedule. A date of vesting schedule is set up by a company to determine when you'll be fully "vested," or acquire full ownership, of certain assets — most commonly retirement funds or stock options. The duration of time in which employee have to wait for granting of shares of the company called as a vesting period. In simple word to answer what is vesting period, vesting period can be stated as waiting period.

VESTING PERIOD

 What is vesting period?It is a period where the employer give an option to buy a shares to an employee with determined price of shares and number of shares within certain specified date of vesting. If the employer gives an option to buy shares to an employee with only conditions that they have to be wait for vesting.

Vesting is the process by which an employee with a qualified retirement plan or stock option plan is entitled to the benefit of ownership. 

Once vesting occurs, the benefits of the plan or stock cannot be revoked. This is true even if the employee no longer works for the company, so long as the vesting period has been met. It give benefit and encourage the employee to work in the company for a longer period. 

Vesting period is only for employee to have option to buy a shares given by employer. In employee stocks option plan, the options granted under the plan confers as a right but not an obligation on the employee. It is requires a continuous service over a specified time period. It is covered under the ambit of Companies Act 2013, where every listed companies have to be regulated by Section 62(1)(b) read with SEBI guidelines.

BENEFITS:

• Encourage the employee to stay remain in the company for a longer time.
• Provide benefits to the employee
• Contribution to retirement plans
• Unconditionally owned by an employee
• Incentive to an employee
• Create interest in a start-up company

CONDITIONS:

Employer will have to stated the following two conditions on date of grant and further that shall not be change by control, price fluctuation or otherwise:

• Quantum of shares issue
• Determined price of a shares

Important Terms:

Grant date: A date on which employer give an options to buy a shares to an employee after a certain number of year of continuous service in the company.

Grant an option: On a grant date where employer give an grant to buy a shares to an employee.

Exercising: is the actual purchase of stock.

Exercise price: By granting an option to an employee, employer will determined and fixed the price of a shares.

Exercise period: Where employee have accepted an option then, employer give an certain period of time to exercise to purchase the shares within that period only otherwise it will considered as dead shares.

Cliff vesting period or schedule: When the employee becomes fully vested at specified time rather than becoming partially vested in increasing amounts over an extended period of time.

How Vesting Period works?

 After understanding what is vesting period lets us understand how vesting period works.For vesting of shares, employer prepare a schedule for granting a share to an employee. Vesting schedule consist of specified period on which grant date, grant of an option, cliff and vesting of shares.

It work as a process for granting an option to an employee. It commonly work in retirement benefit plan and employee stock options.

• Vesting Period for Retirement Benefit:

If employee has serve certain number of continuous service in the company. Then, employer will provide the retirement benefit in form of stock option of the company. Employer will vesting the share immediately on date of retirement as 100% ownership or as per cliff vesting schedule, where employer transfer a 100% ownership of shares to an employee after render the certain number of year of continuous service in the company. Such cliff period can be 1 years or more.

• Vesting Period for Employee Stock Option:

Stock Option provide to an employee the right to buy a stock option but it not an obligation. They can buy an stock option at determined set price and quantum of shares. Employer render the benefit to the employee of the company to encourages and boost for to serve the company for a longer terms.

For instances, employer give a letter of option to buy a shares if the employee will continue working for three more years then 1000 shares at Rs. 10/- per share irrespective of change of control or price fluctuation. Such continue work period of three years is vesting period. If the employer has completed the three years of vesting period then option get vested. Employee got entitlement to those shares, if they exercise the option within cliff period.