Buybacks of employee stock option plans (Esop) remain in vogue in 2021 as start-ups find in it the twin benefit of rewarding employees during the Covid pandemic and prevent equity dilution.

Esop is an employee benefit plan that allows companies to offer ownership interest in the organisation. Under Esop buybacks, employers can repurchase the vested shares of the employees.

While start-ups often reward their employees with Esops to retain talent and incentivise them, buyback of Esops is a relatively newer trend that was kicked off in 2018 by e-commerce major Flipkart. Since then, more than 20 start-ups have gone for Esop buybacks, with some announcing multiple rounds as well.

According to industry estimates, employees were rewarded over Rs 500 crore through Esop buyback in 2020, a year marked by the Covid pandemic and economic slowdown. The trend has continued in 2021 with Cred, Razorpay, Cashify, Zetwork, Wakefit.co and Whatfix among the firms that have reportedly gone for such buybacks.

“Esop buybacks can be used to remunerate employees for their contribution in building the company. Even early employees can get an exit so that they are able to create wealth. For the employers, this creates a pool of available Esops, without diluting equity,” said Archit Gupta, founder and CEO, ClearTax.

“Start-ups go for Esop buyback under specific conditions, like when they want to secure a huge chunk of share for future negotiations, or if the founders want to replenish their Esop pool and they do not want to dilute the start-up any further. It really depends on the situation and the strategy of the start-up to grow further,” said Fahim Alam, CEO at The Better Co.

Companies, however, have to pay a 20 per cent tax on distributed income on buyback of its shares under section 115QA of the Income Tax Act. However, any income arising for shareholders on account of share buybacks is excluded from total income, according to subsection 34A of Section 10 of the Tax Act.