Issue of esop under direct route
Governing laws:
- Section 62(1)(b) of the Companies Act 2013
- Section 67(3)(b) of the Companies Act, 2013
- Rule 12 of Companies (Share Capital and Debentures) Rules 2014
- Rule 16 of Companies (Share Capital and Debentures) Rules 2014
- Rule 18 of Companies (Share Capital and Debentures) Rules 2014
Introduction
Employee Stock Options is a form of compensation that companies offer to their employees. The ESO Plan (ESOP) provides employees with the right to purchase a specific number of shares of the company's stock at a predetermined price for a set period of time. The purpose of an ESOP plan is to incentivize employees to help grow the company's value and share in that growth.
ESOP are typically granted to employees as part of their compensation package. The number of options granted and the exercise price are determined by the company's board of directors or compensation committee. The exercise price is the price at which the employee can purchase the stock. This price is usually set at or above the current market price to ensure that the options are valuable to the employee.
Structure:
Employee Stock Options can be issued in following two ways:
- Direct Route: Upon exercise of option, fresh equity shares are issued by the company to employees. This route is governed by Section 62(1)(b) read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014.
- Indirect Route: Under exercise of option, the trust would first acquire the shares from the secondary market and transfer the shares in the name of employees. This route is governed by Section 67(3)(b) read with Rule 18 of Companies (Share Capital and Debentures) Rules, 2014.
Provision :
- Definition of ESOP Sec 2(37):
“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 predetermined price;
- Sec 62 of the Companies Act 2013:
When a private company comes out with further issue of shares it can be offered to employees under a scheme of ESOS by passing an ordinary resolution and subject to conditions specified in rules.
- Rule 12 procedure for issue of ESOS:
|
Sl No. |
Bullet points |
Legal formalities |
|
1. |
12(1) |
A private company shall not offer shares to its employees under a scheme of employees’ stock option (hereinafter referred to as “Employees Stock Option Scheme”), unless it complies with the following requirements, namely:- (1) the issue of Employees Stock Option Scheme has been approved by the shareholders of the company by passing a ordinary resolution (for private company as per Sec 62). |
|
2. |
Who is employee |
(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. Exception: To startup company with respect to clause (i) and (ii) for 10 years from the date of incorporation |
|
3. |
Disclosures in the explanatory statement annexed to the notice for passing of the resolution- |
(a) the total number of stock options to be granted; (b) identification of classes of employees entitled to participate in the Employees Stock Option Scheme; (c) the appraisal process for determining the eligibility of employees to the Employees Stock Option Scheme; (d) the requirements of vesting and period of vesting; (e) the maximum period within which the options shall be vested; (f) the exercise price or the formula for arriving at the same; (g) the exercise period and process of exercise; (h) the Lock-in period, if any ; (i) the maximum number of options to be granted per employee and in aggregate; (j) the method which the company shall use to value its options; (k) the conditions under which option vested in employees may lapse e.g. in case of termination of employment for misconduct; (l) the specified time period within which the employee shall exercise the vested options in the event of a proposed termination of employment or resignation of employee; and (m) a statement to the effect that the company shall comply with the applicable accounting standards. |
|
4. |
Determination of exercise price |
(3) The companies granting option to its employees pursuant to Employees Stock Option Scheme will have the freedom to determine the exercise price in conformity with the applicable accounting policies, if any. |
|
5. |
The approval of shareholders by way of separate resolution shall be obtained by the company in case of- |
(a) grant of option to employees of subsidiary or holding company; or (b) grant of option to identified employees, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option. |
|
6. |
Exercise period |
There shall be a minimum period of 1 year between the grant of options and vesting of option |
|
7. |
Transferability of options |
The options granted shall be non transferable |
|
8. |
Inclusions in Board report |
(a) options granted; (b) options vested; (c) options exercised; (d) the total number of shares arising as a result of exercise of option; (e) options lapsed; (f) the exercise price; (g) variation of terms of options; (h) money realized by exercise of options; (i) total number of options in force; (j) employee wise details of options granted to;- (i) key managerial personnel; (ii) any other employee who receives a grant of options in any one year of option amounting to five percent or more of options granted during that year. (iii) identified employees who were granted option, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant; |
|
9. |
Maintenance of register |
A register of ESOS shall be maintained in form SH-6. Place - At RO or place decided by board Entries to be authenticated by - CS or Director |
Conclusion
In conclusion, an ESO plan can be a valuable tool for companies to incentivize and retain top talent, align the interests of employees with those of shareholders, and offer a tax-efficient form of compensation. However, there are also risks and downsides that companies should be aware of when considering whether to offer an ESO plan.
