In a layman’s language, Employee Stock Option Plan (ESOP) 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.

We can say that ESOP drives benefit to the both the Company and the Employees as well. Through ESOP, Company can retain its employees with themselves and employees get the chance to acquire ownership in the Company. Overall it’s a better plan for both the Company and the employees.

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”.

SECTION APPLICABLE: Section 62(1)(b) of Companies Act, 2013

RULES APPLICABLE: Rule 12 of Companies (Share Capital and Debentures) Rules, 2014

WHO CAN ISSUE ESOP AND HOW?

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

2. Unlisted Public Companies by way of Special Resolution.

3. Listed Company- In case Shares are listed, Company has to follow SEBI ESOP guidelines as well along with the provisions of the Companies Act, 2013.

TO WHOM ESOP CAN BE ISSUED:

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

2. a director of the company, excluding an independent director; who has been working in India or outside India or of a holding company of the company.

Provided, the following are excluded:

1. an employee who is a promoter or a person belonging to the promoter group;

2. 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.

PROCEDURE:

S. No. Particulars
1. Give notice to Directors along with the agenda and notes on agenda to convene the Board Meeting at least seven days before the date of the meeting in compliance with the Secretarial Standards I to consider the issuance of ESOP.
2. Convene the Board Meeting to decide upon the matter for issuance of ESOP and accordingly, vesting the authority for its execution. In this Board meeting, the Company shall also decide upon the specified employees, in case the ESOP is being offered to specified employees only. Preparation of ESOP scheme is of primary important at this stage.
3. Send notice to members to convene EOGM of least 21 clear days in compliance with the Secretarial Standards II.

The explanatory statement to the notice shall contain the disclosures and information as required under Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.

4. Convene EOGM to pass special/ordinary (as discussed above) resolution to take shareholders approval w.r.t. issuance of ESOP.
5. File MGT-14 within 30 days of passing the special/ordinary resolution.

Attachments:

  • Certified true copy of the special resolution along with the explanatory statement.
  • Notice of the convened EOGM.
6. Filing of PAS-3 whenever the option is exercised by the employees on allotment of shares.

Attachments:

• List of allottees stating their names, address, occupation, if any, and number of securities allotted to each of the allottees and the list shall be certified by the authorised signatory.

• Certified Copy of Copy of Board Resolution.

• Certified Copy of Special Resolution along with the explanatory statement.

IMPORTANT POINTS:

1. It is to be noted that 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.

2. 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).

3. 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.

4. 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 FEMA (transfer of issue of securities to a person resident outside India) Regulations, 2000, FDI regulations and Policy cover the relevant provisions in such cases.

{The author i.e. Kajal Goyal is a Company Secretary in Practice at Kajal Goyal and Associates and can be reached at (M) 9999952595 and (E) cskajalgoyal@gmail.com}

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Qualification: CS
Company: Kajal Goyal and Associates
Location: Delhi, New Delhi, IN
Member Since: 11 Jun 2018 | Total Posts: 49
KAJAL GOYAL AND ASSOCIATES, is a Company Secretary proprietorship firm, offering its expertise and one stop solutions for all Corporate compliance requirements to the clients with a strong emphasis on ethics and ‘being on toes’. Capable delivering services related to Companies Act, FEMA, Re View Full Profile

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