EMPLOYEE STOCK OPTION PLAN (ESOP) – A DETAILED STUDY (Learning No. 11)

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EMPLOYEE STOCK OPTION PLAN (ESOP) – A DETAILED STUDY

INTRODUCTION

In this modern corporate world, Human Resources have become one of the most important assets of the company. Many companies provide various benefits to its employees and are interested not only in retaining them but also for attracting the best talent employees. This has led the enterprises adopting non-traditional methods of making payments to their employees. Share-based payment is one such methods, the use of which has increased significantly during recent times. Now-a-days, more enterprises like IT companies are adopting this method for compensating their employees where manpower is the main assets.

In the layman’s language, ESOP means it is an option given as a right and not an obligation to the employees of the Company to purchase the Company’s shares at a fixed price during a specified period of time. The main objective behind issue of ESOP is to give benefits to both the Company and employees. Through ESOP, Company can retain its employees with themselves and employees get the chance to acquire ownership in the Company.

DEFINITION

In accordance with the provisions of Section 2(37) of Companies Act, 2013, Employees’ Stock Option means “the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price”.

WHO CAN ISSUE ESOP AND HOW?

·  Unlisted Company- Private Companies by way of Ordinary Resolution (Notification dated 05.6.2015)

·      Unlisted Public Companies by way of Special Resolution.

·      Listed Company- Such companies have to follow SEBI (share based employee benefits) Reg, 2014 along with the provisions of the Companies Act, 2013.

IMPORTANT TERMS

·     Granting of option: Grant means issue of options to employees under ESOP.

·     Option: Option means a stock option granted pursuant to the Plan, comprising of a right but not an obligation granted to an Employee under the Plan to apply for and be allotted Shares of the Company at the Exercise Price determined earlier, during or within the Exercise Period, subject to the requirements of Vesting.     

·      Optionee: Optionee means the holder of an outstanding Option granted pursuant to the Plan.

·   Vesting: Vesting means the process by which the employee gains full rights to the options granted to him in pursuance of ESOP.  

·    Vesting period: The period during which the vesting of the option granted to the employee in pursuance of ESOP takes place.

·    Exercise: It is the act of an application being made by the Employee to the Company to have the Options vested in him issued as Shares upon payment of the Exercise Price. Exercise can take place as specified after Vesting.

·     Exercise Period: The period from the date of vesting of options till the date the options can be exercised. On the expiry of the Exercise Period, any Options that have not been exercised will lapse and cease to be valid for any purpose.

·     Exercise Price: The amount to be paid by an Optionee at the time of Exercise of his option. This price is determined at the time of grant and remains constant over the term of the option.

 

METHOD IN WHICH A COMPANY CAN SET UP ESOP

 

·      CREATE AN ESOP TRUST

In this case, the company will issue shares or options to the trust depending on the number of options to be given to the employees. The trust can either give soft loans from its own funds or can raise loans through other sources to meet its financial requirement.

·      GIVE OPTIONS DIRECTLY TO EMPLOYEES

The employees are selected for ESOP options are based on various criteria like performance of the employee, minimum period of service, present and potential contribution of the employees, and such other factors deemed to be relevant for the success of the company. Number of options per employee can be determined taking into consideration, the grade, level, years of service, salary, etc.

 

REGULATORY FRAMEWORK GOVERNING ESOP

·         Companies Act, 2013 read with Companies (Share Capital and Debentures) Rule, 2014

a.    Section applicable: Section 62(1)(b) of the Act

b.    Rules Applicable: Rule 12 of the above Rules.

·         Foreign Exchange Management Act, 1999

·         SEBI (Share based Employee Benefits) Regulations, 2014

·         Income Tax Act, 1961

TO WHOM ESOP CAN BE ISSUED:

a.  a permanent employee of the company who has been working in India or outside India; or

b.  a director of the company, whether a whole time director or not but excluding an independent director; or

c.  an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company.

 

but does not include-

(i)   an employee who is a promoter or a person belonging to the promoter group; or

(ii)  a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.

 

In case of a startup company, as defined in notification issued by the Department for Promotion of industry and Internal Trade, Ministry of Commerce and Industry, Government of India, the conditions mentioned in sub-clause (i) and (ii) shall not apply upto 10 years from the date of its incorporation or registration."

 

PROCEDURE FOR ISSUE OF ESOP FOR LISTED COMPANIES:

1.  Send a notice of Board Meeting to the directors atleast 7 days in advance of meeting. Also an Intimation of advance notice of the Board meeting to the Stock Exchanges (where securities of the Company are listed) atleast 2 working days before meeting. (additional compliance in case of listed companies).

 

2.  Hold Board Meeting for

·   Approving the ESOP

·   Calling and approving the Notice of AGM/EGM for passing Special Resolution

 

3.  Outcome of the Board Meeting is also to be informed to the stock exchange within 30 minutes of the conclusion of the Board meeting. (additional compliance in case of listed companies).

 

4.  Make disclosures to the grantees.

 

5.  Intimate Outcome of the General Meeting to the stock exchanges. (additional compliance in case of listed companies).

 

6.  File e-form MGT-14 within 30 days of passing the special resolution with ROC.

7.  For listing of shares issued pursuant to ESOS, the company shall obtain the in-principle approval of the stock exchanges before issuing shares as per Regulation 28 of SEBI (LODR) Regulations, 2015 where it proposes to list the said shares. (additional compliance in case of listed companies).

 

8.  The company shall appoint a registered merchant banker for the implementation of schemes covered by these regulations till the stage of obtaining in-principle approval from the stock exchanges. (additional compliance in case of listed companies).

 

9.  Grant of options by Nomination & Remuneration Committee. (additional compliance in case of listed companies).

Further, Company shall constitute a Nomination & Remuneration Committee for

i.   granting of options to the employees of the Company.

ii.  administration and superintendence of the scheme which shall formulate the detailed terms and conditions of the schemes including the provisions as specified by SEBI in this regard. The ESOS shall contain the details of the manner in which the scheme will be implemented and operated and no ESOS shall be offered unless the disclosures, as specified by SEBI in this regard, are made by the company to the prospective option grantees.

iii. framing suitable policies and procedures to ensure that there is no violation of securities laws, as amended from time to time, including Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 and Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003 by the company and its employees.

The company granting option to its employees pursuant to ESOP will have the freedom to determine the exercise price provided there shall be a minimum vesting period of one year in case of ESOP

The company may also specify the lock-in period for the shares issued pursuant to exercise of option.

10. Intimate stock exchanges regarding the grant made to the employees.  (additional compliance in case of listed companies).

 

11. If the grant is made to NRI employees, then file Form-ESOP within 30 days of Grant with RBI as per FDI policy.

12. Prepare a list of options to be exercised by the employees.

13. In case of NRI employees, check the mode of payment whether through NRO account/ NRE account or remittance through overseas bank.

14. In case of NRI employees, if the payment is from NRE a/c or through overseas bank, file the intimation of receipt of funds in Form ARF along with KYC and Credit Advice /FIRC on e-biz portal within 30 days of receipt to RBI through AD.

15. Hold Board meeting/ESOP Allotment committee meeting for allotment of shares.

16. Intimate Stock exchanges as soon as reasonably possible and not later than 24 hours.  (additional compliance in case of listed companies).

17. When allotment is made to NRI employees against funds received from NRE a/c or through overseas bank, then as per FDI policy file Form-FCGPR within 30 days of allotment with RBI.

18. File a return of allotment in form PAS 3 with the ROC within 30 days from the date of allotment.  

19. Preparation of Corporate Action Form for NSDL & CDSL for demat account. Send the scanned documents to NSDL/CDSL/RTA for corporate action.  

20. Preparation of Listing Application to the stock exchanges along with the necessary annexures.  (additional compliance in case of listed companies).

21. Make the payment of Stamp Duty.

IMPORTANT POINTS:

Ø  Time period: There shall be a minimum period of one year between the grant of options (when company offer ESOP) and vesting of option (when securities are allotted). 

Ø  Right as a Shareholder not to be enjoyed: The Employees shall not have right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to them, till shares are issued on exercise of option.

Ø  Conditions to be followed after option granted:

i. The option granted to employees shall not be transferable to any other person.

ii. The option granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.

iii. No person other than the employees to whom the option is granted shall be entitled to exercise the option.

Except in the event of the death of employee while in employment, all the options granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.

iv. In case the employee suffers a permanent incapacity while in employment, all the options granted to him as on the date of permanent incapacitation, shall vest in him on that day.

v. In the event of resignation or termination of employment, all options not vested in the employee as on that day shall expire.

5.Variation: The company may by special resolution vary the terms of the ESOP Scheme not yet exercised by the employees provided such variation is not prejudicial to the interests of the option holders.

6. The company shall maintain a Register of Employee Stock Options in Form No. SH.6 and the entries therein shall be authenticated by the company secretary of the Company or by any other person authorized by the Board for the purpose.

TAXATION AT THE TIME OF ISSUANCE OF ESOP:

At the time of allotment of shares on the exercise date, the difference between fair market value of the shares as on exercise date and the amount that employee have paid for the exercise or subscription to the shares is calculated and taxed accordingly. This taxable value is called Perquisite Value. This difference calculated is eligible for TDS deduction by the company and forms part of salary of the employee which is shown in Form 16 and Form 12BA of the employee.

FEMA PROVISIONS FOR ESOPS:

Many persons entitled to ESOPs work in foreign countries. The provisions of Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and related FDI policy need to be complied.

BENEFITS OF ESOPs

·      To attract and retain talented employees.

·      To motivate employees to work better and participate actively in the success of the company.

·      To control costs and minimize the risk.

·      Exercise price remains fixed over the term of option. So the employees would exercise his option when the market price of shares goes substantially high and he would gain on the difference between market price and exercise price.

·      Lower attritions rates.

 

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