Procedure for Issue of ESOP by Private Companies

As per section 2 (37) of the 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.

A company, other than a listed 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: –

I. The issue of Employees Stock Option Scheme has been approved by the shareholders of the company by passing a special resolution (ordinary resolution in case of a private company).

Explanation: For the purposes of ESOP ‘‘Employee’’ means-

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.

II. The company shall make the following 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;

Stepwise procedure for issue of ESOP by Private Company is mentioned below;

1. Prepare the draft of ESOP in accordance with the Section 62 of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital & Debentures) Rules, 2014 and other applicable rules as may be amended from time to time.

2. Prepare the notice for the board meeting along with the draft resolution to be passed in the board meeting.

3. Send the notice of the board meeting to all the directors at least seven days before the meeting.

4. 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 an ordinary resolution for issuing ESOP.

5. 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.

6. 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.

7. Pass ordinary resolution for the issuance of shares under the ESOP to the employees, directors and officers of the company in the general meeting.

8. The approval of shareholders by way of separate resolution shall be obtained by the company in case of-

i. grant of option to employees of subsidiary or holding company; or

ii. 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.

9. File MGT-14 form with the Registrar of Companies within thirty days of passing the ordinary 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. 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.

12. There should be a minimum vesting period of one year from the date of grant of options.

Provided that in a case where options are granted by a company under its Employees Stock Option Scheme in lieu of options held by the same person under an Employees Stock Option Scheme in another company, which has merged or amalgamated with the first mentioned company, the period during which the options granted by the merging or amalgamating company were held by him shall be adjusted against the minimum vesting period required under this clause;

Note: Vesting period is that period that exists between the times when the employees are issued ESOPs till the time such employees gain access to the rights that attach to the options or shares.

13. The company shall have the freedom to specify the lock-in period for the shares issued pursuant to exercise the options.

14. 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 he exercises the options granted to him.

15. Once the options are exercised by the employee who has been granted the options under ESOP on completion of vesting period the Company needs to file PAS-3 (Return of Allotment) within thirty days from the allotment of shares, with Registrar of Companies (ROC).

Note:

i. The employee will deliver letter of exercise to the company in respect of the options granted to him which he is willing to exercise on completion of vesting period.

ii. The company on receipt of letter of exercise hold a board meeting to pass a resolution for allotment of shares in respect of the options being exercised through the letter of exercise by the employee.

iii. The company shall file PAS-3 within thirty days from the date of allotment of shares with the ROC.

FAQs

Q.1 As the Companies Act, 2013 restricts directors holding either by himself or through his relative directly or indirectly more than 10% of the outstanding equity shares of the company and any employee who is a promoter or related to promoter group from participation in ESOP. Is there any exemption for Startups?

Ans. In case of a startup company, recognized by DPIIT, is exempted from the restrictions of ESOP for its promoters and directors, holding more than 10% of outstanding equity shares for a period of 10 years from the date of its incorporation.

Q.2 Can a company issue ESOPs to an employee who is a shareholder of the company as well?

Ans. Yes, a company can issue ESOPs to such employee, however if such employee is a director than the issue of ESOP shall be subject to 10% restriction.

Q.3 Whether the person who is working is a professional and not an employee of the company is eligible for ESOP?

Ans. ESOP can be granted to the employees of the company only. Since the professionals working for or in the company is not on the payroll of the company, they are not eligible for the ESOP.

Q.4 What is vesting period and what is the minimum duration as per the law?

Ans. Vesting period is that period that exists between the times when the employees are issued ESOPs till the time such employees gain access to the rights that attach to the options or shares.

The minimum vesting period as per the applicable law is at least 1 year from the date of grant of options.

Q.5 Can a company fix the exercise price under ESOP less than the face value of the shares?

Ans. No, a company cannot fix the exercise price under ESOP less than the face value of the shares.

Q.6 What are the types of shares which can be issued under ESOP?

Ans. Any form of shares may be issued under ESOP.

Q.7 Can exercise price under ESOP be different for each employee?

Ans Yes, the exercise price under ESOP can be different for each employee. The exercise price and other factors may vary from employee to employee as per the letter of grant issued to them.

Q.8 Is there any remedy if the employee is unable to exercise the options granted due to lack of funds?

Ans Yes, the remedies for the same can be provided in the ESOP policy and a clause regarding the same can be incorporated in the letter of grant as well.

The company can also give loan to such employee to exercise the options granted.

The employee can take loan from financial institutions as well.

The company can in accordance with the provisions and steps as specified in the ESOP further extend the period of exercise with the necessary approvals for a period as may be decided by the concerned authority (be it board of directors or some other committee or director).

(Republished with amendments)