The respective provisions of the Act and the Rules can be read in two perspectives i.e. provisions governing –
The provisions relating to issue of ESOPs are common for all the unlisted Companies irrespective of their status being Private or Public; whereas the provisions on Trust set-up, funding, etc. are relevant for an unlisted Public Company which is dealt with in the later part.
The provisions relating to issue of ESOPs applicable for all unlisted Companies are:
i. Employee under an ESOP Scheme – Rule 12(1) read with Section 2(37), 197(7) of the Companies Act, 2013 defines the term to mean any permanent employee or Director whether a whole-time or not and whether working in India or not. The employees and Directors of the Holding, Subsidiary and Associate Company are also covered. The specific exclusions are:
a) An Independent Director;
b) An employee who is a Promoter or belongs to the Promoter Group; and
c) A Director who directly or indirectly holds more than 10% of outstanding equity shares of the Company.
ii. Procedural requirements – Rules 12(1), 12(2) and 12(4) read with section 62(1)(b) of the Companies Act, 2013 require:
a) Approval of the ESOP Scheme by the members of the Company by way of a special resolution;
b) There shall be separate resolutions in case of grant of ESOPs to employees of the Subsidiary or Holding Company or in case of grant of ESOPs to identified employees equal to or exceeding 1% of the issued capital; and
c) The explanatory statement shall disclose prescribed details namely total number of ESOPs to be granted, appraisal process, requirements of vesting, exercise price or pricing formula, exercise period, lock-in period, method of accounting, etc.
iii. Other requirements – Rest of the Sub-rules of Rule 12 besides giving the flexibility to the Company to determine the exercise price and lock-in of shares, require:
a) Variation of terms of the ESOPs to be carried out by way of members’ approval by way of a special resolution provided it is not prejudicial to the interests of the employees;
b) Minimum vesting period of 1 year;
c) Non-transferability of the ESOPs;
d) Unvested ESOPs to vest in case of death or permanent incapacity of an employee;
e) Disclosure of prescribed details in the Directors’ Report; and
f) Maintenance of an ESOP Register.
In the context of ESOP, SEBI has notified on October 28, 2014, Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014.
It is to provide for regulation of all schemes by companies for the benefit of their employees involving dealing in shares, directly or indirectly, with a view to facilitate smooth operation of such schemes while preventing any possible manipulation and matters connected therewith or incidental thereto.
|Schemes:(i) employee stock option schemes;(ii) employee stock purchase schemes;
(iii)stock appreciation rights schemes;
(iv) general employee benefits schemes; and
(v) retirement benefit schemes.
|Any companyWhose shares are listed on a recognized stock exchange in India, and has a scheme:(i) for direct or indirect benefit of employees; and
(ii) involving dealing in or subscribing to or purchasing securities of the company, directly or indirectly; and
(iii)satisfying, directly or indirectly, any one of the following conditions:
a.the scheme is set up by the company or any other company in its group;
b.the scheme is funded or guaranteed by the company or any other company in its group;
c. the scheme is controlled or managed by the company or any other company in its group.
Shares issued to employees in compliance with the provisions pertaining to preferential allotment as specified in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009
Scheme may be implemented
Mandation for trust route, if the scheme involves secondary acquisition or gift or both
In case of a single trust, it shall keep and maintain –
for each such scheme so as to explain its transactions and to disclose at any point of time the financial position of each scheme and in particular give a true and fair view of the state of affairs of each scheme.
Non-eligibility for being a trustee if the person
|Trustee Type||Minimum such required|
|Individual or OPCs||2|
Powers, Rights and Duties of Trustees
|A||for the schemes enumerated in Part A, Part B or Part C of Chapter III of these regulations||5%|
|B||for the schemes enumerated in Part D, or Part E of Chapter III of these regulations||2%|
|C||for all the schemes in aggregate||5%|
*Above Limits shall include enhanced capital on account of bonus, rights or split.
*Limits shall be for aggregate of multiple trusts and schemes.
*Ceiling Limit not to apply where shares are allotted to the trust by way of new issue or gift from promoter or promoter group or other shareholders.
*If options, shares or SAR granted > number of shares that the trust may acquire through secondary acquisition, then such shortfall shall be made up by the company through new issue of shares to the trust.
If not appropriated, then the same shall be disclosed to the stock exchange(s) at the end of such period and then the same shall be sold on the recognized stock exchange(s) where shares of the company are listed, within a period of five years from the date of notification of these regulations.
Off-market transfer of Shares
Compensation Committee Constitution
Approval of Shareholders
Approval of shareholders by way of separate resolution in the general meeting shall be obtained by the company in case of:
(a). Secondary acquisition for implementation of the schemes. Such approval shall mention the percentage of secondary acquisition (subject to limits specified under these regulations) that could be undertaken;
(b). Secondary acquisition by the trust in case the share capital expands due to capital expansion undertaken by the company including preferential allotment of shares or qualified institutions placement, to maintain the five per cent. cap as prescribed under sub-regulation (11) of regulation 3 of such increased capital of the company;
(c). Grant of option, SAR, shares or other benefits, as the case may be, to employees of subsidiary or holding or associate company;
(d). Grant of option, SAR, shares or benefits, as the case may be, to identified employees, during any one year, equal to or exceeding one per cent. of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option, SAR, shares or incentive, as the case may be.
Variation of terms of the schemes
Certificate from auditors
The board of directors shall at each annual general meeting place before the shareholders a certificate from the auditors of the company that the scheme(s) has been implemented in accordance with these regulations and in accordance with the resolution of the company in the general meeting.
The above has been compiled by CS Reema Jain, an Associate Member of ICSI. Her areas of interest include Corporate and Allied Laws and advisory services. For any queries or suggestions, she can be approached at firstname.lastname@example.org, 9953299308.