ESOP is (Employee Stock Option Plan) issued by Company to its “employee” as a reward on behalf of their services to encourage them.
But it is to be noted that “employee” can avail benefits of ESOP after completion of specified vesting period in the organization. If employee leave the organization before completion of vesting period, he is not eligible to take ESOP. When the employee completes the predefined vesting period, they can exercise their ESOPs.
Please note, the employee stock option plan is a contractual agreement that offers employees the right, but not the responsibility, to purchase or subscribe to a defined number of firm shares at a fixed price, such as the exercise price. There is no change in the exercise price if once decided even if future market prices increase.
Please note, The Employees shall not have right to receive any dividend or to vote or in any manner and also not enjoy the benefits of a shareholder in respect of option granted to them, till he exercises the options granted to him.
Benefits of ESOP:
Company can take deduction of expenses to allot ESOP to its employee in income Tax and employee get company’s shares at lowest price.
ESOP value calculated in the form of perquisites in the head of salary of the employee. However, when an employee exercises his option, the difference between Fair Market Value (FMV) as on the date of exercise and the exercise price is taxable as a perquisite.
As per rule, The Companies (Share Capital and Debentures Rule, 2014), other than listed company, ESOP scheme shall be approved by Shareholders of the Company.
Definition of 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 anybody corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.
Please note, above Clause i and ii shall not be applicable on start up company till ten years from the date of registration under start up.
Employee who is not eligible for ESOP: The professionals who are working in the organization not on the pay roll are not eligible for Employee stock option.
Valuation method of ESOP:
A company can set the exercise price below the current market price or at a discounted method but it cannot be below the face value of the shares.
Procedure to issue ESOP:
1. Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 (“Rules”), following process to be followed to an issue of ESOP:
2. Prepare the draft of ESOP in accordance with the Companies Act, 2013 and Rules.
3. Prepare the notice for the board meeting along with the draft resolution to be passed in the board meeting.
4. Send the notice of the board meeting to all the directors at least seven days before the meeting.
5. Pass the resolution for the issuance of shares through ESOP, determine the price of shares to be issued pursuant to ESOP and fix time and date and approve for calling the general meeting to pass a special resolution for issuing ESOP.
6. Send the draft minutes of the board meeting to all the directors within fifteen days of its conclusion and file the MGT-14 form with the Registrar of Companies of passing the board resolution.
7. Send notice of the general meeting to all the directors, auditors, shareholders and secretarial auditors of the company at least before twenty-one days of the date of the meeting.
8. Pass the special resolution for the issuance of shares under the ESOP to the employees, directors and officers of the company in the general meeting.
9. File MGT-14 form with the Registrar of Companies within thirty days of passing the special resolution in the general meeting along with the documents.
10. Send options to the employees, directors and officers of the company for purchasing shares under ESOP.
11. when option exercise by employee then file form PAS-3 to ROC.
12. Maintain a ‘Register of Employee Stock Options’ in Form No.SH-6 and enter the particulars of the ESOP granted to the employees, directors or officers of the company.
If a private company wants to issue ESOP, then it should ensure that the Articles of Association (AoA) authorises for issuance of shares through ESOP. If the AoA does not authorise, then the company should first hold an extraordinary general meeting to alter the AoA to include the provisions of issuance of shares through ESOP and then proceed with holding the board meeting for the passing of the resolution and getting the shareholder’s approval for ESOP Scheme.
Disclosure in explanatory statement: The company shall make the following disclosures in the explanatory statement which attached 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.
Some definition which helps to understand above:
Option Grant: “option Grant” means offer stocks to the employee
Option Vest: “Option vest” means stock apply by employee who offer to them
Option Exercise: “Option exercise” means employee can exercise the buying of the share which he applied for.
Tax calculation on ESOP at the time of selling of stock.
When an employee sells the shares, it is treated as Capital Gains and thus taxable under the Capital Gain head.
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