Concept of Preferential Allotment Private Placement of Shares & Employees-Stock Option Plan (ESOP)

Preferential Allotment

Preferential Allotment means allotment of shares at a predetermined price to the identified people who are interested in taking shares in the company such as promoters, venture capitalists, financial institutions, buyers of company’s products or its suppliers.
Concept of Private Placement of Share
Private placement means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of private placement offer letter and which satisfies the conditions specified in this section.
Simple Defination -: securities offered to the selective group of persons by issuing private placement offer is known as the Private Placement of shares.|

Concept of Employees-Stock Option Plan (ESOP)

Employees Stock Option Plan (ESOP) means option granted by the company to its employees and employee directors to subscribe the shares at a price that is lower than the market price, fair value. It is an option or a right granted by the company but it is not an obligation on the employee to subscribe it.
* Employees Stock Option Plan is a category of Sweat Equity. Sweat Equity is a wider term than ESOP and includes issue of shares to promoters as remuneration for incorporating the company or for their other services.
Some Conditions that A company has to fulfil during issue stock (shares) options .
(a) these shares are of the same class of shares already issued;
(b) it is authorised by a special resolution passed by the company;
(c) the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;
(d) not less than one year has, at the date of issue, elapsed since the date on which the company had commenced business; and
(e) these shares are issued in accordance with SEBI regulations, if the shares are listed. Green Limited company grants option to subscribe 1,000 shares of ₹ 10 each to its 200 employees at a price of ₹ 30 per share. Vesting period is three years. The fair (market) price of a share on the date of grant was ₹ 45. Only 150 employees exercised the option by the exercise date. Draw up necessary journal entries in the books of Ever Fresh Ltd. company.
Solution-:

In the Books of Green Ltd. JOURNAL
Date	Particular	l.F.	Dr. Amount ₹	Cr. Amount ₹
	Employees Compensation Expense A/c Dr To Shares Options Outstanding A/c (One-third amount of difference between fair value and exercise price recognised as expense) (45 – 30 = 15 x \| = 5 x 1,000 x 200)		10,00,000	10,00,000
	Employees Compensation Expense A/c Dr To Shares Options Outstanding A/c (One-third amount of difference between fair value and exercise price recognised as expense) (45 – 30 = 15 x \| = 5 x 1,000 x 200)		10,00,000	10,00,000
	Employees Compensation Expense A/c Dr. To Shares Options Outstanding A/c(One-third amount of difference between fair \|value and exercise price recognised as expense) (45 – 30 = 15 x \| = 5 x 1,000 x 200)		10,00,000	10,00,000
	Bank A/c Dr. To Share Application A/c (Applications money @ { 30 per share from 150 employees exercising the option for 1,50,000 shares)		45,00,000	4 5,00,000
	Share Application A/c (1,50,000 x 30) Dr. Shares Options Outstanding A/c Dr. To Share Capital A/c (1,50,000 x 10) To Securities Premium Reserve A/c (1,50,000 shares allotted to employees exercising the option and proportionate amount transferred \|to Securities Premium Reserve A/c)		45,00,000 22,50,000	15,00,000 52,50,000
	Shares Options Outstanding A/c Dr. To General Reserve A/c (Amount of options not exercised transferred to 1 General Reserve A/c) (50 x 1,000 x 15)		7,50,000	7,50,000

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