This is a scheme through which a company encourages employee’s participation in the business of a company. Under this scheme company offers certain shares from the new issue to the whole time directors, officers or employees of the company. The company offers the shares at a pre-determined price which is usually less than the price offered to general public. The ESOS must be approved by passing a special resolution in the general meeting. This scheme is open to all permanent employees. However, the option granted to employee is non-transferable.
This scheme is useful to those companies whose business activity depends upon the talents, skills and knowledge of employees such as software companies, mechanical production etc.

As per SEBI guidelines 'employee' for the purpose means:

a)       A permanent employee of the company working in India or out of India or

b)       A director of the company.

An employee as defined in sub clause (a) or (b) may be of a subsidiary in India or out of India or of a holding company of the company.

The other guidelines for employees stock option scheme are as follows:

1.       The company must constitute a compensation committee for administration and superintendence of the ESOS.

2.       The issue of ESOS should be approved by shareholders by passing a special resolution.

3.       ESOS would be open to all permanent employees, officers and directors of the company.

4.       Option granted to an employee shall not be transferable to any person.

5.       Option granted can't be pledged (it's not a promise), hypothecated or mortgaged.

6.       In the event of death, option granted to an employee shall vest in his or legal successor or employee.